EXHIBIT 13
Annual Report to Shareholders of City Holding Company
Selected Financial Data
- - - - - - - - --------------------------------------------------------------------------------
Table One
Five-Year Financial Summary
(in thousands, except per share data)
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Summary of Operations
Total interest income $ 195,553 $ 196,680 $ 173,166 $ 159,708 $ 145,743
Total interest expense 97,133 93,337 76,012 68,334 61,180
Net interest income 98,420 103,343 97,154 91,374 84,563
Provision for loan losses 19,286 8,481 4,064 5,012 3,609
Total other income 59,535 72,423 32,613 16,473 11,343
Total other expenses 130,614 155,558 84,899 70,066 61,908
Income before income taxes 8,055 11,727 40,804 32,769 30,389
Net income 6,213 5,234 26,291 21,281 20,200
Per Share Data
Net income (basic) $ 0.37 $ 0.31 $ 1.60 $ 1.34 $ 1.26
Net income (diluted) 0.37 0.31 1.60 1.34 1.26
Cash dividends declared (1) 0.80 0.77 0.73 0.63 0.56
Book value per share 11.77 13.08 13.13 11.86 11.52
Selected Average Balances
Total loans $ 1,792,625 $ 1,676,828 $ 1,427,269 $ 1,286,868 $ 1,206,408
Securities 390,839 377,834 409,713 419,974 464,024
Deposits 2,017,448 1,974,995 1,698,699 1,616,479 1,559,106
Long-term debt 110,592 95,926 46,129 24,666 8,204
Trust preferred securities 87,500 32,452 - - -
Stockholders' equity 219,211 235,616 204,114 181,923 168,353
Total assets 2,718,732 2,566,099 2,180,460 2,021,988 1,874,056
Selected Year End Balances
Net loans $ 1,859,001 $ 1,698,319 $ 1,490,411 $ 1,315,078 $ 1,262,243
Securities 381,112 395,722 378,330 412,586 450,570
Deposits 1,955,770 2,064,415 1,779,805 1,626,666 1,602,996
Long-term debt 116,000 102,719 75,502 34,250 20,000
Trust preferred securities 87,500 87,500 - - -
Stockholders' equity 198,542 220,059 220,277 188,784 177,522
Total assets 2,792,490 2,706,004 2,286,424 1,995,878 1,983,871
Selected Ratios
Return on average assets 0.23% 0.20% 1.21% 1.05% 1.08%
Return on average equity 2.83 2.22 12.88 11.70 12.00
Average equity to average assets 8.06 9.18 9.36 9.00 8.98
Dividend payout ratio (1) 216.22 248.39 35.96 34.81 36.47
(1) Cash dividends and the related payout ratio are based on historical results
of the Company and do not include cash dividends of acquired companies
prior to the dates of consummation.
1
Two Year Summary Of
Common Stock Prices And Dividends
Cash
Dividends Market Value
Per Share* Low High
1999
Fourth Quarter $ .20 $ 13.313 $ 20.375
Third Quarter .20 18.125 30.875
Second Quarter .20 25.750 32.250
First Quarter .20 24.813 31.250
1998
Fourth Quarter $ .20 $ 30.000 $ 37.125
Third Quarter .19 34.250 44.875
Second Quarter .19 41.000 48.000
First Quarter .19 41.500 51.000
*Cash dividends represent amounts declared by the Company and do not include
cash dividends of acquired companies prior to the dates of acquisition.
City Holding Company's common stock trades on The Nasdaq Stock Market under
the symbol CHCO. This table sets forth the cash dividends paid per share and
information regarding the market prices per share of the Company's Common Stock
for the periods indicated. The price ranges are based on transactions as
reported on the The Nasdaq Stock Market. At December 31, 1999, there were 4,208
stockholders of record. See NOTE SIXTEEN of the Audited Consolidated Financial
Statements for a discussion of restrictions on bank dividends.
Management's Discussion & Analysis Of Financial Condition And Results Of
Operations
Forward-Looking Statements
All statements other than statements of historical fact included in this
Annual Report, including statements in the Letter to Shareholders and in
Management's Discussion and Analysis of Financial Condition and Result of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act of 1934. Such information involves risks and uncertainties that
could result in the Company's actual results to differ from those projected in
the forward-looking information. Important factors that could cause actual
results to differ materially from those discussed in such forward-looking
statements include: (1) the Company may not complete the proposed sale of the
Company's specialty finance servicing and origination divisions; (2) the sale of
the specialty finance servicing and origination divisions, if completed, may not
have the long-term positive impact on the Company's operating results currently
anticipated; (3) other plans initiated by the Company to improve its long-term
profitability may not be completed timely or may not have the anticipated impact
on the Company's operating results; (4) current earnings from the Company's
subsidiaries may not be sufficient to fund the cash needs of the Parent Company,
including the payment of stockholders' dividends; (5) as critical dates approach
during 2000, the Company's technology systems may experience Year 2000-related
disruptions; (6) regulatory rulings affecting, among other things, the Company's
and its banking subsidiaries' regulatory capital and required loan loss
allocations may change, resulting in the need for increased capital levels or an
increased allocation for loan losses, with a resulting adverse effect on
expected earnings; (7) changes in the interest rate environment may have results
on the Company's operating results materially different from those anticipated
by the Company's market risk management functions; (8) changes in general
economic conditions and increased competition could adversely affect the
Company's operating results; and (9) changes in other regulations and government
policies affecting bank holding companies and their subsidiaries, including
changes in monetary policies could negatively impact the Company's operating
results. Forward-looking statements made herein reflect management's
expectations as of the date such statements are made. Such information is
provided to assist stockholders and potential investors in understanding current
and anticipated financial operations of the Company and are included pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances that arise after the date such
statements are made.
City Holding Company
City Holding Company (the Company), a West Virginia corporation
headquartered in Charleston, West Virginia, is a multi-bank holding company that
provides diversified financial products and services to consumers and local
businesses. Through its network of 62 banking offices in West Virginia, Ohio and
California, the Company provides credit, deposit, investment advisory, insurance
and technology products and services to its customers. In addition to its branch
network, the Company's delivery channels include ATMs, check cards,
telemarketing, direct mail solicitation, interactive voice response systems, and
Internet technology.
2
Prior to 1999, the Company diversified its product lines and established
mortgage-banking and other financial services operating segments. When added to
the Company's existing community-banking operations, these segments enabled the
Company to expand the types of products and services it could provide to its
customers and enabled the Company to pursue additional interest and non-interest
related sources of income. With the integration of the operations of Horizon
Bancorp, Inc. during 1999, including the consolidation of each of Horizon's five
separate banking subsidiaries into the Company's lead bank, City National Bank
of West Virginia ("City National"), the Company began to reallocate its
resources to its core business segment, community banking. As a result, during
1999 the Company entered into negotiations to sell, in part or in its entirety,
the Company's specialty finance servicing and origination operations.
Recent Developments
In connection with a routine examination of the Company's lead bank,
City National Bank of West Virginia, by the Office of the Comptroller of the
Currency, an additional loan loss reserve was recorded as of December 31, 1999.
The additional provision is reflected in the Consolidated Financial Statements
and the notes thereto. See Allowance and Provision for Loan Losses for further
discussion.
On March 3, 2000, the Company announced that City National had signed a
binding term sheet to sell its specialty finance mortgage servicing and
origination operations. In exchange, City National would receive notes
receivable of approximately $42 million.
As evidenced by amounts reported in the Consolidated Statements of Income
for mortgage loan servicing fees, origination fees, gains on sales of loans, and
advertising expense, specialty finance operations within the Company's mortgage
banking segment had grown over the past few years to represent a significant
portion of the Company's operations. Prior to the third quarter of 1998, the
specialty finance industry experienced significant growth nationwide and
generated sizeable profits for the Company. However, the predominate
participants in this sector were highly leveraged, specialty finance companies.
When this industry experienced a severe credit crisis during the third quarter
of 1998, many of the specialty finance companies encountered cash flow problems
and were forced to exit this business line or significantly restructure their
operations. As this transformation occurred, the profitability of this product
line was adversely affected as end-investors in junior lien mortgage loans and
securitization transactions adjusted to credit and reputation risk concerns
associated with these products. As a result, the profitability of this product
for the Company experienced significant deterioration, as reflected in segment
reporting presented in Note Twenty-Five to the Notes to Consolidated Financial
Statements.
To address the reduced profitability of the Company's specialty finance
operations and to reduce the volatility of the Company's operating results, the
Company determined during the first quarter of 1999 to downsize its specialty
finance operations. During the second quarter of 1999, the Company entered into
negotiations to form a joint venture with an independent third party, which
would have included the partial sale of the Company's junior lien mortgage loan
servicing and origination divisions. As negotiations continued, the Company
determined that the outright divestiture of these operations would better serve
the Company's shareholders and, ultimately, return the Company to more
consistent earnings results. Although a pre-tax loss between $2.00 million and
$5.00 million may be recognized if the sale is completed, management believes
that this divestiture will have an overall favorable impact on the Company's
2000 and future operating results. The sale of these divisions is scheduled to
be completed during the second quarter of 2000 pending regulatory approval.
Mergers and Acquisitions
Effective July 1, 1999, the Company acquired Frontier Bancorp and its
wholly-owned subsidiary, Frontier State Bank (collectively, "Frontier").
Frontier, headquartered in Redondo Beach, California, reported total assets and
total deposits of approximately $88 million and $71 million, respectively, at
June 30, 1999. Pursuant to the merger agreement, the Company paid approximately
$15.13 million cash for 100% of the outstanding common stock of Frontier
Bancorp. This transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations have been included in the
consolidated totals from the date of acquisition. Due to the immaterial impact
on the Company's financial statements, no proforma information has been included
herein.
On December 31, 1998, the Company's merger with Horizon Bancorp, Inc.
(Horizon) became effective. The transaction was accounted for under the
pooling-of-interests method of accounting. As such, the Company's historical
financial information was restated to include the operations of Horizon for all
periods presented.
In April 1998, the Company acquired Del Amo Savings Bank, FSB (Del Amo), a
federally-chartered savings bank headquartered in Torrance, California. This
transaction was accounted for under the purchase method of accounting.
Accordingly, the operations of Del Amo have been included in the consolidated
financial statements from the date of acquisition.
In April 1998, City National acquired Citynet Corporation and MarCom, Inc.
The operations of these entities were consolidated into Citynet, a division of
City National. With the addition of these companies, City National expanded its
internet banking capabilities and introduced new internet technology products to
its customers, including balance inquiry and funds transfer capabilities, loan
payment processing, bill payment processing, and web site development. In March
1998, City National increased the size of its insurance brokerage division with
the acquisition of Morton Specialty Insurance Partners, Inc. (Morton). Morton
was subsequently consolidated into RMI, Ltd., a division of City National, and
increased the diversity of insurance products the Company offers. Also within
the other financial services business segment, City National acquired
3
Jarrett/Aim Communications (Jarrett/Aim) in January 1998. Jarrett/Aim, a
division of City National, conducts direct mail marketing for the Company and
third party customers.
Financial Summary
Consolidated net income for 1999 was $6.21 million or $0.37 per diluted
common share, compared to $5.23 million or $0.31 per diluted common share in
1998. In 1997, the Company reported $26.29 million net income or $1.60 per
diluted common share. Return on average assets (ROA), a measure of the
effectiveness of asset utilization, for 1999, 1998, and 1997 was 0.23%, 0.20%,
and 1.21%, respectively. Return on average equity (ROE), a measure of the return
on stockholders' investment for 1999, 1998, and 1997 was 2.83%, 2.22%, and
12.88%, respectively.
Significant factors impacting 1999 operating results included a $9.90
million loss on investment securities transactions (see Investments), a $4.88
million decline, compared to 1998, in net interest income (see Net Interest
Income), and a $10.81 million increase, compared to 1998, in the Company's loan
loss provision (see Allowance and Provision for Loan Losses). Partially
offsetting these declines in pre-tax income, the Company reported $8.80 million
of gains realized from the sale of branch locations (see Other Income and
Expenses).
In 1998, the Company's operating results were affected primarily by $13.55
million of merger-related expenses associated with the merger of Horizon, a
$2.93 million increase, compared to 1997, in the Company's loan loss provision,
and $3.80 million of expenses related to conforming operating and accounting
policies resulting from the merger of Horizon and the restructuring of the
Company's specialty finance operations. Additionally, during 1998, the Company
reported gains from the sale of loans of $14.24 million, an increase of $9.85
million compared to 1997.
Balance Sheet Analysis
Average total assets increased from $2.57 billion in 1998 to $2.72 billion
in 1999, an increase of $152.63 million or 5.95%. To a lesser extent, average
interest-bearing assets increased as well, from $2.36 billion in 1998 to $2.45
billion in 1999. This increase of $89.44 million or 3.79% was primarily the
result of increases in the Company's loan portfolio. Additionally, the
acquisition of Frontier in the third quarter of 1999 added to the growth within
the 1999 balance sheet.
Within interest-earning assets, the average balance of the Company's loan
portfolio increased $115.80 million or 6.91% during 1999. The commercial loan
portfolio grew approximately 15.69% during the year as City National continued
to pursue additional commercial loan relationships. Additionally, the
residential mortgage portfolio experienced 12.71% growth during 1999, primarily
within its variable rate products. The average balance of loans held for sale,
within the mortgage banking segment, declined $72.26 million or 28.79% from 1998
to 1999, reflecting the Company's significantly reduced participation in the
junior lien mortgage loan program.
The average balance of retained interests in securitized loan pools
increased $57.99 million or 238.20% during 1999 as a result of the Company's one
loan securitization in 1999 and the timing and increasing size of the four loan
securitizations transacted during 1998. The decrease of $25.10 million in
federal funds sold during 1999 was primarily attributable to the consolidation
of the former Horizon banking operations into City National during the year.
Funds previously invested in federal funds were reallocated during 1999 within
the consolidated City National operations to fund loan growth.
The average balance of other assets increased $27.26 million or 26.77%
during 1999 as a result of City National's purchase of an additional $20.00
million of bank owned life insurance. Recorded in Other Assets within the
Consolidated Balance Sheets, this asset yielded a tax-equivalent return of 7.65%
during 1999. The income earned from this asset is included in non-interest
income in the Consolidated Statements of Income.
Although the Company experienced an overall decline in total deposits in
1999, from $2.06 billion at December 31, 1998 to $1.96 billion at December 31,
1999, the average balance of total deposits actually increased by approximately
2.15% from 1998 to 1999. The decline in actual deposits, year-to-year, was the
result of branch sales representing $121.48 million of deposits and some
reduction experienced in City National's core deposit customer base. However,
due to the timing of those branch sales, the 1999 acquisition of Frontier, and
the second quarter 1998 acquisition of Del Amo, the average balance of total
deposits increased $42.45 million from 1998 to 1999.
The minimal increase in average total deposits during 1999 was not
sufficient to fund growth within the Company's loan portfolio. As a result, the
Company increased its short- and long-term borrowings during the year. In
addition to funding loan growth, $15.13 million of the increase in borrowings
was related to the Company's acquisition of Frontier. The average balance of
trust preferred securities increased $55.05 million during 1999 as a result of
the timing of the issuance of those securities in 1998. Of the total $87.50
million outstanding balance of trust preferred securities at December 31, 1999
and 1998, $57.50 million was issued during the fourth quarter of 1998, thus
having minimal impact on the 1998 average balance.
Average interest-earning assets increased $332.82 million or 16.42% during
1998 from $2.03 billion in 1997 to $2.36 billion in 1998. Of this increase, the
acquisition of Del Amo represented approximately $85 million (primarily in the
real estate loan classification), increases in the average balance of loans held
4
for sale represented approximately $70 million, and increases in the average
balance of retained interests in securitized loan pools represented $24.35
million. The remaining $154 million increase, 7.60% of the 1997 average earning
assets balance, reflects the Company's continued growth in its existing
operating markets. This in-market growth, primarily in real estate and
commercial loan products, is attributable to the Company's community banking
philosophy of retaining local autonomy at its banking divisions and emphasis on
community-based banking relationships.
Of the $332.82 million increase in interest-earning assets, approximately
$239 million is attributable to the community banking segment. The acquisition
of Del Amo and in-market growth, as described above, represents the majority of
this growth. Increases in the average balances of loans held for sale and
retained interests in securitized loan pools are derived from the Company's
mortgage banking segment. These are the direct result of the Company's
investment in and creation of its retail origination and correspondent lending
divisions and its loan securitization program during the fourth quarter of 1997.
The increase in interest-earning assets resulting from retained interests in
securitized loan pools is the result of the Company's four loan securitizations
during 1998, which yielded approximately 9.51% during 1998.
Average interest-bearing liabilities increased approximately $319.36 million
or 18.84% to $2.01 billion in 1998 from $1.69 billion in 1997. Of this increase,
the acquisition of Del Amo represented approximately $83 million or 4.90%.
Average interest-bearing deposit growth, excluding Del Amo, represented
approximately $157.44 million or 9.29% as the Company's banking subsidiaries
continued to experience increases in deposit market share within their existing
markets.
The average balance of long term debt increased approximately $49.80 million
during 1998 as the Company took advantage of declines in longer term interest
rates, utilizing long term borrowing facilities through the Federal Home Loan
Bank that are available to its subsidiary banks. This additional funding was
used to finance the growth experienced in the Company's loan portfolio and loans
held for sale balances.
Although a portion of the increase in long term debt is attributable to the
General Corporate operating segment, the majority of the increase in long term
debt and increases in the deposit base are associated with the Company's
community banking segment. Also during 1998, the Company, through its
wholly-owned trust subsidiaries, issued $87.50 million of trust preferred
securities, resulting in an average balance for 1998 of $32.45 million. While
portions of the proceeds received were used for general corporate purposes, the
majority of the proceeds were used to either provide necessary capital to the
mortgage banking segment or to repay long term debt that had originally been
obtained to provide such capital. Therefore, all of the interest expense
associated with the trust preferred securities is considered by management in
its evaluation of the profitability of the mortgage banking segment.
5
Table Two
Average Balance Sheets and Net Interest Income
(in thousands)
1999 1998 1997
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------
ASSETS
Loan portfolio (1) $1,792,625 $ 152,320 8.50% $1,676,828 $ 147,536 8.80% $ 1,427,269 $ 130,234 9.12%
Loans held for sale 178,711 16,406 9.18 250,968 23,013 9.17 180,543 17,847 9.89
Securities:
Taxable 287,333 17,675 6.15 279,086 17,189 6.16 311,560 19,840 6.37
Tax-exempt (2) 103,506 7,742 7.48 98,748 7,623 7.72 98,153 7,811 7.96
-------------------------------------------------------------------------------------------------
Total securities 390,839 25,417 6.50 377,834 24,812 6.57 409,713 27,651 6.75
Retained interests 82,337 3,876 4.71 24,346 2,315 9.51 - - -
Federal funds sold 5,093 244 4.79 30,191 1,672 5.54 9,817 489 4.98
-------------------------------------------------------------------------------------------------
Total interest-earning 2,449,605 198,263 8.09 2,360,167 199,348 8.45 2,027,342 176,221 8.69
assets
Cash and due from banks 89,515 58,750 71,311
Premises and equipment 69,710 63,991 48,610
Other assets 129,121 101,858 51,467
Less: allowance for possible
loan losses (19,219) (18,667) (18,270)
-------------------------------------------------------------------------------------------------
Total assets $ 2,718,732 $ 2,566,099 $ 2,180,460
==============================================================================
LIABILITIES
Demand deposits $ 378,645 $ 11,315 2.99% $ 299,543 $ 9,447 3.15% $ 262,036 $ 7,782 2.97%
Savings deposits 322,856 10,586 3.28 411,886 12,026 2.92 393,088 12,075 3.07
Time deposits 1,024,823 49,563 4.84 987,170 52,959 5.36 803,035 42,949 5.35
Short-term borrowings 230,060 11,436 4.97 187,140 9,677 5.17 190,467 9,945 5.22
Long-term debt 110,592 6,219 5.62 95,926 6,223 6.49 46,129 3,028 6.56
Trust preferred securities 87,500 8,014 9.16 32,452 3,005 9.26 - - -
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,154,476 97,133 4.51 2,014,117 93,337 4.63 1,694,755 75,779 4.47
Demand deposits 291,124 276,396 240,540
Other liabilities 53,921 39,970 41,051
Stockholders' equity 219,211 235,616 204,114
-------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 2,718,732 $ 2,566,099 $ 2,180,460
===================================================================================================
Net interest income $ 101,130 $ 106,011 $ 100,442
===================================================================================================
Net yield on earning assets 4.13% 4.49% 4.95%
===================================================================================================
(1) For purposes of this table, non-accruing loans have been included in
average balances and loan fees, which are immaterial, have been included in
interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of
approximately 35%.
Net Interest Income
Net interest income is generally most significantly impacted by activities
conducted within the community banking operation segment. However, the mortgage
banking segment also affected net interest income during 1999 and 1998 through
net interest income earned on loans held for sale, retained interests in
securitized loan pools, and the cost of capital utilized by the Company to
finance mortgage-banking activities.
On a tax equivalent basis, net interest income declined $4.88 million or
4.60% during 1999 and the Company's net interest margin declined 36 basis
points, from 4.49% in 1998 to 4.13% in 1999. Within the mortgage banking
segment, interest earned on loans held for sale declined $6.61 million in 1999,
primarily as a result of the Company's significantly reduced participation in
the origination and acquisition of junior lien mortgage loans. Although the
yield earned on this product remained stable, the significant decline in volume
6
resulted in a lower average balance of loans held for sale and, therefore, the
sizeable decrease in interest income on these loans. Additionally, the yield
earned on the Company's retained interests declined from 9.51% in 1998 to 4.71%
in 1999. This decline, within the mortgage banking segment, was due to the
actual performance of the underlying collateral loans and revised forecasts
associated with the timing of the receipt of cash flows by the Company. As a
result of these revisions, the accrual of income was suspended during the year.
Income will be recognized in future periods unless any further decline in the
anticipated performance of the underlying loan pools occur.
Also within the mortgage banking operations, interest expense on trust
preferred securities increased $5.01 million during 1999. This increase was due
to the timing of the issuance of those securities in 1998, as previously
discussed.
Although net interest income, on a tax equivalent basis, increased $5.57
million or 5.54% during 1998, the Company experienced an overall decline in its
net interest margin of 46 basis points from 4.95% in 1997 to 4.49%. Within the
community banking segment, the yield earned on real estate loans declined 59
basis points in 1998 as interest rates on residential real estate loans reached
record lows nationwide. Although yields on the commercial and consumer
obligation portfolios remained relatively stable, the rate decline in the real
estate portfolio resulted in an overall decline of 32 basis points for the total
loan portfolio. While the return on the loan portfolio decreased from 9.12% in
1997 to 8.80% in 1998, the average cost of total interest and
noninterest-bearing deposits increased 7 basis points from 3.70% in 1997 to
3.77% in 1998. This increase was partially offset by a 5 basis point decline in
short-term borrowing interest rates during 1998.
Within the mortgage banking segment, the yield earned on loans held for sale
declined 72 basis points during 1998 from 9.89% in 1997 to 9.17%. This decline
was also due to changes in the residential real estate interest rate
environment. Volume increases in loans held for sale resulted in $6.54 million
of additional interest income, partially offset by a $1.37 million decline due
to interest rate changes. During 1998, the Company earned $2.32 million in
interest income resulting from its retained interest in its five securitized
loan pools, compared to no similar income in 1997. Partially offsetting
increases in interest income resulting from mortgage banking activities, the
cost of trust preferred securities, used primarily to capitalize mortgage
banking operations, represented $3.01 million in interest expense during 1998
with no similar cost in 1997.
Table Three
Rate/Volume Analysis Of Changes In Interest Income And Expense
(in thousands)
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------
Interest Earning Assets
Loan portfolio $ 9,955 $ (5,171) $ 4,784 $ 21,250 $ (3,948) $ 17,302
Loans held for sale (6,633) 26 (6,607) 6,537 (1,371) 5,166
Securities:
Taxable 507 (21) 486 (2,016) (635) (2,651)
Tax-exempt (1) 360 (241) 119 47 (235) (188)
-----------------------------------------------------------------------------
Total securities 867 (262) 605 (1,969) (870) (2,839)
Federal funds sold (1,229) (199) (1,428) 1,122 61 1,183
Retained interest in securitized loans 3,217 (1,656) 1,561 2,315 - 2,315
----------------------------------------------------------------------------
$ 6,177 $ (7,262) $ (1,085) $ 29,255 $ (6,128) $ 23,127
Total interest-earning assets ===============================================================================
Interest Bearing Liabilities
Demand deposits $ 2,386 $ (518) $ 1,868 $ 1,162 $ 503 $ 1,665
Savings deposits (2,803) 1,363 (1,440) 563 (612) (49)
Time deposits 1,964 (5,360) (3,396) 9,878 132 10,010
Short-term borrowings 2,146 (387) 1,759 (173) (95) (268)
Long-term debt 884 (888) (4) 3,231 (36) 3,195
Trust preferred securities 5,042 (33) 5,009 3,005 - 3,005
-----------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,619 $ (5,823) $ 3,796 $ 17,666 $ (108) $ 17,558
-----------------------------------------------------------------------------
Net interest income $ (3,442) $ (1,439) $ (4,881) $ 11,589 $ (6,020) $ 5,569
=============================================================================
(1) Fully federal taxable equivalent using a tax rate of approximately 35%.
The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
7
Other Income And Expenses
Non-interest income declined in 1999 to $59.54 million from $72.42 million
in 1998 primarily as a result of activity within the mortgage banking segment.
This $12.88 million or 17.80% decline was attributable to a $9.90 million loss
on investment securities transactions in 1999 and a $14.83 million decline in
income from mortgage banking activities. Within the mortgage banking segment,
the loss on investment securities transactions was the result of the Company's
$10.00 million pre-tax charge against earnings related to its investment in
Altiva Financial Corporation ("Altiva"). During the fourth quarter of 1999, the
Company determined that the decline in the estimated fair value of its
investment in Altiva (formerly Mego Mortgage Corporation) could no longer be
supported as "other than temporary". Due to the significant changes that
occurred within the specialty-finance industry during 1999 and the dilution in
the Company's ownership position of Altiva in December 1999, the Company
determined that this charge to earnings was necessary. The Company originally
made its $10.00 million investment in Altiva as part of a total $87.50 million
recapitalization of that company.
Also within Other Income, revenues derived from mortgage banking operations
declined from $47.79 million in 1998 to $32.96 million in 1999, a decrease of
$14.83 million or 31.03%. Although mortgage loan servicing revenues increased
$3.01 million during 1999, gains recognized from loan sales declined $7.64
million or 53.65% and net origination fees decreased $10.20 million or 70.38%.
As the Company's volume of junior lien mortgage loan originations declined in
1999, fee income generated from the origination of those loans declined
similarly. Additionally, with reduced volume and less favorable secondary market
pricing for this product, gains recognized from the sale of these loans declined
significantly during 1999. In addition to a reduced volume of loan sales for
cash gains in 1999, the Company also reduced the number and total size of loan
securitizations. During 1999, the Company completed one securitization resulting
in a $3.88 million pre-tax gain, compared to four securitizations completed in
1998 resulting in pre-tax gains of $8.60 million. Subsequent to the May 1999
securitization, management effectively terminated its loan securitizaton
program.
Partially offsetting these declines in non-interest income in 1999, the
Company recognized $8.80 million of gains resulting from the sale of seven
branch locations. Certain of the branch sales transacted during 1999 were
necessary for the Company to comply with the conditional regulatory approvals
obtained related to the Company's 1998 merger of Horizon. As part of this
overall restructuring of City National, during 1999 the Company also merged the
operating systems of each of its West Virginia banking locations, into City
National. This merger of operating systems also included the conversion of the
former Horizon banks from their external service bureau to City National's
internally-maintained data and items processing systems. The combination of
these conversions and the branch sales discussed above, caused City National to
experience significant reconcilement issues between subsidiary systems and the
Company's financial accounting systems, some of which remained unresolved at
December 31, 1999. At December 31, 1999, the Company assessed these remaining
differences and recorded a loss reserve of approximately $2.70 million to
provide for possible financial exposure as a result of these reconcilement
issues. Management believes the reserve is sufficient to provide for potential
income statement exposure. Additionally, during 1999 the Company froze the
Horizon defined benefit pension plan, which resulted in the termination of
benefits for future services accruing under the plan. All future benefits were
transferred to the Company's defined contribution plan. The financial impact of
freezing the Horizon defined benefit plan was quantified during the fourth
quarter of 1999 resulting in the Company recognizing a $3.67 million curtailment
gain, representing the change in projected benefit obligation, less a $1.00
million charge-off of prior service costs associated with the plan.
Non-interest expense declined $24.94 million or 16.04% from $155.56 million
in 1998 to $130.61 million in 1999. Of this decrease, advertising expense
declined $15.53 million or 55.81% from 1998 to 1999. The majority of this
decline occurred within the mortgage banking segment as a result of the
Company's reduced nationwide solicitation and direct mail marketing of the
junior lien mortgage product. Additionally, Other Expenses declined $8.16
million or 17.45% from $46.75 million in 1998 to $38.59 million in 1999. As
further discussed below, in 1998 the Company recorded a number of charges
against earnings related to its merger of Horizon. Within the general corporate
segment, the Company recorded $4.61 million of non-recurring professional fees
associated with the Horizon merger. Within the community banking segment, the
Company recorded a $2.50 million non-recurring write-down in the recorded value
of goodwill determined to be impaired. Due to the nature of these non-recurring
charges, no similar items were recorded in 1999. Additionally, in 1998, the
Company recorded a non-recurring $2.00 million charge against earnings within
its mortgage banking segment associated with the restructuring of its
specialty-finance divisions.
In comparing 1998 to 1997, within the community banking segment other income
increased approximately $5.50 million or 39.67%, from $13.86 million in 1997 to
$19.36 million in 1998. Generally, this increase is associated with the overall
volume growth of products offered by the banking divisions and the related fee
income generated by these products. Other expenses increased approximately
$20.94 million or 34.23% during 1998, from $61.17 million in 1997 to $82.10
million. Fourth quarter charges to earnings of approximately $5.87 million,
comprised primarily of a $2.50 million write down in the recorded value of
8
goodwill determined to be impaired, and $1.58 million associated with employee
severance costs, represented 28% of the 1998 increase in other expenses within
this segment. Increases in occupancy, depreciation, maintenance and data
processing represented approximately $3.85 million or 18% of the increase during
1998. Additionally, the acquisition of Del Amo in 1998 further increased total
other expenses by approximately $2.47 million or 12% of the 1998 increase.
Other income within the mortgage banking segment increased $29.78 million or
169% during 1998, from $17.64 million in 1997 to $47.41 million. Net origination
fees on junior lien mortgage loans increased $12.03 million in 1998,
representing 40% of the increase. Gains recognized from the sale or
securitization of mortgage loans increased approximately $9.85 million,
representing 33% of the increase. Additionally, mortgage loan servicing fees
increased $7.13 million during 1998, representing 24% of the increase in other
income within the mortgage banking segment. Each of these increases was
primarily the result of the Company's fourth quarter 1997 investment in its
network of retail origination platforms and the corresponding development of
exit strategies for junior lien mortgage loans, including third-party loan sales
and securitizations. Increases realized from mortgage loan servicing were
primarily the result of fees earned from servicing securitized loan pools.
Additionally, in September 1998, the servicing division completed the
acquisition of the right to service an additional $535 million of junior lien
mortgage loans from a third party, which resulted in increased servicing fees
recognized during the fourth quarter.
Other expenses within the mortgage banking segment also experienced
significant increases, from $14.70 million in 1997 to $50.75 million in 1998, an
increase of $36.05 million or 245%. Of this increase, approximately $25.04
million is associated with the advertising for and direct mail solicitation of
junior lien mortgage loans. Additionally, employee compensation and benefits
represented an increase of $3.77 million during the year. Costs associated with
the four loan securitizations completed during the year, primarily underwriting
and other professional fees, represented $2.80 million of the 1998 increase in
other expenses. Finally, the Company also recorded a $2.00 million charge to
earnings during the fourth quarter of 1998 involving the restructuring of its
retail origination and wholesale acquisition divisions.
The general corporate segment, which primarily consists of the Parent
Company, recognized an increase in other expenses of approximately $8.23 million
or 95% during 1998. This increase was primarily due to merger-related charges
associated with the Company's merger of Horizon. Of the increase, $4.61 million
was the result of advisory and other professional fees, $1.70 million due to the
termination of data processing contracts previously entered into by Horizon, and
$1.60 million associated with employee severance costs.
Income Taxes
Income tax expense for the year ended December 31, 1999 was $1.84 million,
compared to $6.49 million and $14.51 million for the years ended December 31,
1998 and 1997, respectively. The Company's effective tax rates for 1999, 1998,
and 1997 were 22.87%, 55.37%, and 35.57%, respectively. Due to the decline in
pre-tax income in 1999, as compared to years prior to 1998, non-taxable interest
income as a percentage of pre-tax income increased significantly, resulting in
the 1999 decline in the effective tax rate. In 1998, the Company's effective tax
rate was significantly higher than 1999 and 1997 as a result of non-deductible
merger-related expenses associated with the merger of Horizon. The Company's
effective tax rate in 1997 was not impacted by non-deductible merger expenses
and the impact of non-taxable interest income was less severe as a result of
higher pre-tax income.
Market Risk Management
Market risk to the Company is the risk of loss arising from changes in
current and future cash flows, fair values, earnings, or capital due to adverse
movements in interest rates. The Company seeks to reduce interest rate risk
through asset and liability management, where the goal is to optimize the
balance between earnings and interest rate risk. The Company's asset and
liability management function is responsible for reviewing the interest rate
sensitivity position of the Company and establishing policies to monitor and
limit exposure to interest rate risk. Management measures interest rate risk
through an interest sensitivity gap analysis as illustrated in TABLE FOUR and
through performing an earnings sensitivity analysis which is further discussed
in this section.
At December 31, 1999, the one year period shows a negative gap (liability
sensitive) of $871.22 million. This analysis is a "static gap" presentation and
movements in deposit rates offered by the Bank lag behind movements in the prime
rate. Such time lags affect the repricing frequency of many items on the
Company's balance sheet. Accordingly, the sensitivity of deposits to changes in
market rates may differ significantly from the related contractual terms. TABLE
FOUR is first presented without adjustment for expected repricing behavior.
Then, as presented in the "management adjustments" line, these balances have
been notionally distributed over the first three periods to reflect those
portions of such accounts that are expected to reprice fully with market rates
over the respective periods. The distribution of the balances over the repricing
periods represents an aggregation of such allocations and is based upon
historical experience with individual markets and customers. Management expects
to continue the same pricing methodology in response to market rate changes;
however, management adjustments may change as customer preferences, competitive
market conditions, liquidity, and loan growth change. Also presented in the
9
management adjustments line are loan prepayment assumptions, which may differ
from the related contractual terms of the loans. These balances have been
distributed over the four periods to reflect those loans that are expected to be
repaid in full prior to their maturity date. After management adjustments, TABLE
FOUR shows a negative gap in the one-year period of $837.81 million. Generally,
a negative gap position is advantageous when interest rates are falling because
interest-bearing liabilities are being repriced at lower rates and in greater
volume, which has a positive effect on net interest income. However, when
interest rates are rising, this position produces the converse effect.
Table Four
Interest Rate Sensitivity Gaps
(in thousands)
1 TO 3 MO. 3 TO 12 MO. 1 TO 5 YRS. OVER 5 YRS. TOTAL
-------------------------------------------------------------------------------------
ASSETS
Gross loans $ 456,800 $ 238,130 $ 960,471 $ 230,713 $ 1,886,114
Loans held for sale 118,025 - - - 118,025
Securities 51,281 26,115 245,082 58,634 381,112
Federal funds sold 1,990 - - - 1,990
Retained interest 76,963 - - - 76,963
-------------------------------------------------------------------------------------
Total interest-earning assets 705,059 264,245 1,205,553 289,347 2,464,204
LIABILITIES
Savings and NOW accounts 764,960 - - - 764,960
All other interest-bearing deposits 237,010 425,700 276,274 5,272 944,256
Short-term borrowings 380,359 4,352 2,008 - 386,719
Long-term debt 28,145 - 50,000 37,855 116,000
Trust preferred securities - - - 87,500 87,500
-------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,410,474 430,052 328,282 130,627 2,299,435
-------------------------------------------------------------------------------------
Interest sensitivity gap $ (705,415) $(165,807) $ 877,271 $ 158,720 $ 164,769
-------------------------------------------------------------------------------------
Cumulative sensitivity gap $ (705,415) $(871,222) $ 6,049 $ 164,769
=====================================================================================
Management adjustments $ 11,139 $ 33,417 $ 20,759 $ (65,315)
=====================================================================================
Cumulative management adjusted gap $ (694,276) $(837,805) $ 26,808 $ 99,454
=====================================================================================
The table above includes various assumptions and estimates by management as to
maturity and repricing patterns. Future interest margins will be impacted by
balances and rates which are subject to change periodically throughout the year.
In addition to the interest rate sensitivity gap analysis, the Company
performs an earnings sensitivity analysis to identify the impact of changes in
interest rates on its net interest income. Since the simulated gap analysis
incorporates management assumptions as noted in the previous gap analysis
discussion, actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
The Company's policy objective is to avoid negative fluctuations in net
interest income of 10% within a twelve-month period. As of December 31, 1999,
the Company had the following estimated earnings sensitivity profile:
Basis Point Change Percentage Change in
in Interest Rates Net Interest Income
---------------------------------------------------
200 point increase (13.32%)
200 point decrease 3.74%
The results of the simulation model indicate that an immediate and sustained
200 basis point increase in interest rates would result in a corresponding
reduction in net interest income of 13.32% over a twelve-month period, which is
an exception to the Company's policy objective. As a result of increased levels
of short-term borrowings at December 31, 1999, the Company's weighted average
cost of funds is currently higher than normal. As discussed previously, the
Company has increased borrowings to fund growth within the Company's loan
portfolio and to supplement declines in deposit balances in the short term.
In an effort to address this policy exception, the Asset/Liability Committee has
initiated procedures to slow growth within the loan portfolio and to attract
deposit growth. As a result of these initiatives, the Company expects to retire
certain short and long-term borrowings and, therefore, reduce interest rate risk
within the Company's Consolidated Balance Sheets to more acceptable levels.
Liquidity: The Company manages its liquidity position to provide necessary
funding for asset growth and to ensure that the funding needs of its customers
can be satisfied promptly. Liquidity management is accomplished by maintaining a
significant portion of the Company's investment portfolio classified as
10
available-for-sale, maintaining sufficient borrowing capacity with the Company's
lenders and providing consistent growth in the core deposit base of its banking
subsidiaries. The Company also utilizes its access to the capital markets as a
tool for managing its liquidity position.
The Company has entered into agreements with three investment banking firms
to issue over $100 million of the Company's certificates of deposit. The
certificates of deposit can be issued in maturities of up to five years at rates
equal to a comparable Treasury instrument at the time of issuance plus a
market-based spread. The Company is not committed to issuing a pre-determined
amount of its certificates of deposit under these agreements, the use of which
is at the sole discretion of the Company. At December 31, 1999 and 1998, $28.04
million and $22.0 million, respectively, of certificates of deposit had been
sold under these agreements at an average interest rate of 5.72% and 5.36%,
respectively. The average remaining term of the issued certificates of deposit
was 6 months and 1.5 years at December 31, 1999 and 1998, respectively.
An additional source of liquidity includes the Parent Company's $24.0
million revolving loan agreement. At December 31, 1999, $12.13 million was
outstanding pursuant to the terms of the agreement. As necessary, the Parent
Company has used funds available from this facility to provide additional
capital to its subsidiaries, to finance merger and acquisition activity, and to
fund internal growth and expansion. At December 31, 1999, the Company was in
violation of a loan covenant under this agreement relating to required return on
average asset ratios. The Company obtained a waiver for this violation.
As available, dividends from the Company's subsidiaries are expected to be
used to satisfy the cash needs of the parent company. As more fully discussed in
NOTE SIXTEEN, during 2000, the subsidiary banks can, without prior regulatory
approval, declare dividends of approximately $1.69 million to the Parent
Company, plus net profits earned during the year.
The Company's cash and cash equivalents, represented by cash, due from
banks, and federal funds sold, are a product of its operating, investing and
financing activities as set forth in the Consolidated Statements of Cash Flows
included herein. In 1999, net proceeds from loans held for sale activity
provided $134.86 million of cash to the Company, which was the primary reason
Operating Activities provided $105.59 million of cash during the year. During
1998, loans held for sale transactions had the opposite effect, resulting in a
net cash outflow of $85.62 million and Operating Activities utilizing $131.20
million of cash. Also within Operating Activities, the Company purchased $20.00
million of additional Bank Owned Life Insurance during 1999, which is included
in the Other Assets portion of the Consolidated Statements of Cash Flows.
Net cash used in Investing Activities increased $76.84 million from 1998 to
1999, primarily as a result of $64.99 million of cash outflow related to the
Company's sale of seven branch locations during 1999.
Cash provided by Financing Activities decreased from $280.46 million in 1998
to $135.60 million in 1999, a decline of $144.86 million or 51.65%. This decline
was largely due to the $84.15 million of cash received during 1998 from the
issuance of trust preferred securities, with no similar issuance during 1999.
Additionally, deposit balances declined $52.50 million in 1999, primarily as a
result of branch sales. This compares to a $182.04 million increase in deposit
balances during 1998. As a short-term replacement for declines in deposit
balances and in preparation for Year 2000-related potential deposit runoff, the
Company's short-term borrowings increased $191.17 million from December 31, 1998
to December 31, 1999.
Investments
As illustrated in TABLE FIVE, the Company's investment portfolio is
comprised primarily of U.S. Treasury and other U.S. government agency
securities. As of December 31, 1999, 1998, and 1997, investments in these
securities represented 62%, 75%, and 79%, respectively, of the total investment
securities portfolio. The remaining investments within the portfolio include
securities of state and local subdivisions and other debt and equity securities.
The Company's investment portfolio is structured to provide flexibility in
managing liquidity and interest rate risk, while providing acceptable rates of
return. Horizon maintained selected debt securities in a held-to-maturity
classification based on its management's intent and Horizon's ability to hold
such securities to maturity. On April 1, 1999, the Company reclassified those
securities from held-to-maturity to available for sale. This transfer was
consistent with the Company's Investment Portfolio accounting policies and
provides management with additional liquidity alternatives and more flexibility
in managing the Company's interest rate risk. At the date of transfer, the
amortized cost of those securities was $39.04 million and the unrealized gain on
those securities was $1.26 million.
The Company had $1.2 million in structured notes as of December 31, 1999.
All structured notes are federal agency securities and have a weighted average
coupon of 3.17% and a weighted average maturity of 2.2 years. The impact of
holding these securities on the results of operations was immaterial for the
period ending December 31, 1999.
As previously mentioned in the discussion of Other Income and Expense, the
Company recognized a pre-tax charge of $10.00 million during the fourth quarter
of 1999 as a result of its determination that the investment in Altiva Financial
Corporation ("Altiva") could no longer be supported as "other than temporary".
Factors that were considered and that resulted in this charge to earnings
included the significant changes that have occurred within the specialty finance
industry in recent months and the dilution in the Company's ownership position
11
of Altiva as a result of a second recapitalization completed by Altiva in
December 1999. The $10.00 million pre-tax charge, reported within the mortgage
banking segment, is included in Investment securities (losses) gains in the
Consolidated Statements of Income.
Table Five
Investment Portfolio
(in thousands)
Carrying Values as of
December 31
1999 1998 1997
-------------------------------------------------
Securities available-for-sale:
U.S. Treasury and other U.S. government corporations and agencies $ 235,230 $ 258,095 $ 258,936
States and political subdivisions 99,143 69,002 57,116
Other 46,739 29,562 20,724
Securities held to maturity:
States and political subdivisions - 39,063 41,554
-------------------------------------------------
Total $ 381,112 $ 395,722 $ 378,330
=================================================
At December 31, 1999, there were no securities of any non-governmental issuers
whose aggregate carrying or market value exceeded 10% of stockholders' equity.
Maturing
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
government corporations and
agencies $ 23,567 6.42% $ 186,275 6.22% $ 25,388 7.07% $ - -
States and political subdivisions 7,363 8.24 39,582 7.77 34,598 7.42 17,600 7.19
Other 36,722 6.44 1,417 6.23 2,430 6.54 6,170 6.64
---------------------------------------------------------------------------------------
Total $ 67,652 6.63% $ 227,274 6.49% $ 62,416 7.24% $ 23,770 7.05%
=======================================================================================
Weighted average yields on tax-exempt obligations of states and political
subdivisions have been computed on a fully federal tax-equivalent basis using a
tax rate of approximately 35%.
Loan Portfolio
The composition of the Company's loan portfolio is presented in the following
table:
Table Six
(in thousands)
December 31
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
Commercial, financial and agricultural $ 589,116 $ 509,214 $ 464,678 $ 442,981 $ 417,828
Real estate-mortgage 949,830 842,727 676,828 574,897 537,097
Installment loans to individuals 347,168 363,988 367,095 327,222 337,786
-----------------------------------------------------------------------------
Total loans $ 1,886,114 $ 1,715,929 $ 1,508,601 $ 1,345,100 $ 1,292,711
=============================================================================
The loan portfolio increased 9.92% in 1999, from $1.72 billion at December
31, 1998, to $1.89 billion at December 31, 1999. Of this $170.19 million
increase, the acquisition of Frontier represented $59.74 million. The remaining
$110.45 million increase is due to the Company's continued growth in its
existing markets. The Company grants portfolio loans to customers generally
within the market areas of its subsidiary banks. Although the Company has, in
recent years, more actively solicited commercial loan volume, the loan portfolio
12
remains relatively concentrated in residential real estate loans. Approximately
50% of the total portfolio is comprised of residential real estate loans at
December 31, 1999, compared to 49% of the total portfolio at December 31, 1998.
The following table shows the maturity of loans outstanding as of December 31,
1999:
Maturing
-------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------------------------------------------
Commercial,
financial and $268,400 $ 273,603 $ 47,113 $ 589,116
agricultural
Real 412,126 429,167 108,537 949,830
estate-mortgage
Installment loans
to individuals 50,612 253,335 43,221 347,168
-------------------------------------------
Total loans $731,138 $ 956,105 $198,871 $1,886,114
===========================================
Loans maturing after one year with:
Fixed interest rates $ 706,481
Variable interest rates 448,495
------------
Total $1,154,976
============
Allowance And Provision for Loan Losses
Management systematically monitors the loan portfolio and the adequacy of
the allowance for loan losses on a quarterly basis to provide for losses
inherent in the portfolio. Through the Company's internal loan review
department, management assesses the risk in each loan type based on historical
trends, the general economic environment of its local markets, individual loan
performance and other relevant factors. Individual credits are selected
throughout the year for detail loan reviews, which are utilized by management to
assess the risk in the portfolio and the adequacy of the allowance. Due to the
nature of commercial lending, evaluation of the adequacy of the allowance as it
relates to these loan types is often based more upon specific credit review,
with consideration given to historical charge-off percentages and general
economic conditions. Conversely, due to the homogeneous nature of the real
estate and installment portfolios, the portions of the allowance allocated to
those portfolios are primarily based on prior charge-off history and general
economic conditions, with less emphasis placed on specifically reviewing
individual credits, unless circumstances suggest that specific reviews are
necessary. In these categories, specific loan reviews would be conducted on
higher balance and higher risk loans. In evaluating the adequacy of the
allowance, management considers both quantitative and qualitative factors.
Quantitative factors include actual repayment characteristics and loan
performance, cash flow analyses, and estimated fair values of underlying
collateral. Qualitative factors generally include overall trends within the
portfolio, composition of the portfolio, changes in pricing or underwriting,
seasoning of the portfolio, and general economic conditions. Reserves not
specifically allocated to individual credits are generally determined by
analyzing potential exposure and other qualitative factors that could negatively
impact the adequacy of the allowance. Determination of such reserves is
subjective in nature and requires management to periodically reassess the
validity of its assumptions. Differences between net charge-offs and estimated
losses are assessed such that management can timely modify its evaluation model
to ensure that adequate provision has been made for risk in the total loan
portfolio.
During 1999, the allowance for loan losses increased $9.50 million or
53.96%, from $17.61 million to $27.11 million at December 31, 1998 and 1999,
respectively. A portion of this increase was attributable to a 9.88% increase in
gross loans, from $1.72 billion to $1.89 billion at December 31, 1998 and 1999,
respectively. However, the Company also experienced an 8.33% increase in
"at-risk" loans, as evidenced by Table Eight, from $14.85 million at December
31, 1998 to $16.09 million at December 31, 1999. Additionally, the acquisition
of Frontier resulted in a $738,000 or 4.19% increase in the allowance for loan
losses. Furthermore, in connection with a routine examination of the Company's
lead bank, City National, by the Office of the Comptroller of the Currency
(OCC), an additional loan loss reserve of $6 million was recorded as of December
31, 1999, for various qualitative and general economic factors, and to bring
City National's allowance for loan losses to a level more consistent with its
peer group.
The provision for loan losses in 1999 was $19.29 million, compared to $8.48
million and $4.06 million in 1998 and 1997, respectively. The increased
provision in 1999 was due, in part, to the increase in the allowance of $6.00
million as a result of the aforementioned OCC exam and also a $783,000 or 6.83%
increase in loans charged off during 1999 as compared to 1998. Additionally,
during the fourth quarter of 1999, the Company determined that a significant
increase in the provision for loan losses was necessary to provide for probable
losses in the portfolio identified during a detailed review of policies and
procedures throughout City National. As the Company continued to consolidate the
operations of Horizon into the Company, including the merging of Horizon's five,
previously separate banking operations into City National, the Company
identified additional credit quality and credit administration issues which
resulted in the increased fourth quarter 1999 loan loss provision. As the
lending policies and credit culture of the Company were instituted throughout
the newly-consolidated City National, management determined that additional loss
exposures existed within the loan portfolio. Such exposures were primarily
centered in the commercial, indirect lending, and other consumer loan
classifications. A detailed review of lending policies and procedures, credit
administration programs, and specifically selected credit relationships was
completed during the fourth quarter of 1999. As a result of this process and the
results of the recently completed OCC exam, the Company recorded a fourth
quarter 1999 provision for loan losses of $11.96 million, compared to a third
quarter 1999 provision of $2.68 million. Having completed this review,
management believes that the consolidated allowance for loan losses at December
31, 1999 is adequate to provide for losses inherent in the Company's loan
portfolio.
The percentage of the allowance for loan losses allocated to the commercial
loan portfolio increased from 36% in 1998 to 53% in 1999. This increase is
consistent with the increase in commercial loan charge-offs experienced by the
Company over the previous two years. Commercial loan charge-offs increased
13
64.57% from $2.39 million in 1998 to $3.93 million in 1999. From 1997 to 1998,
commercial loan charge-offs increased 163%, from $906,000 in 1997 to $2.39
million in 1998. These increases are attributable to both the recent growth
within the commercial loan portfolio and the consistent application of credit
administration policies throughout City National, as previously discussed. The
decline in the percentage of the allowance for loan losses allocated to the
residential mortgage and installment loan portfolios is due to declines in loan
charge-offs within those classifications.
As compared to 1997, the 1998 decrease in the allowance and the related
percentages of the allowance to total year-end loans is primarily due to certain
charge-offs occurring in the fourth quarter of 1998 related to Horizon's
indirect lending portfolio. During 1998, the Company recorded loan charge-offs
of approximately $11.47 million and recorded recoveries of $1.62 million
resulting in net charge-offs of $9.85 million. This represents an increase of
$6.57 million or 200% from 1997 net charge-offs of $3.28 million. Loans
charged-off within the installment loan portfolio represented approximately
$2.94 million of this increase. Charge-offs related to indirect automobile loans
offered by certain Horizon banks, represented approximately $2.4 million of this
increase. Commercial loan charge-offs represented $2.4 million of the 1998
increase, while real estate loan charge-offs comprised the remaining $1.23
million. The increase in commercial loan charge-offs can primarily be attributed
to credit exposure related to three significant credits associated with the
former Horizon banks. Included primarily in the real estate charge-offs, and to
a lesser extent the commercial and installment portfolios, are charge-offs of
$1.20 million associated with the Company's identification of credit quality
issues within one of its geographic markets.
As these exposures were quantified, management increased the Company's
provision for loan losses $4.42 million from 1997 to 1998. As previously
indicated, the fourth quarter 1998 quantification of additional indirect lending
portfolio losses and management's restructuring of this program resulted in a
$1.51 million charge to earnings, recorded through the loan loss provision.
Tables Seven, Eight and Nine detail loan performance and analyze the
allowance for loan losses.
Table Seven
Analysis Of The Allowance For Loan Losses
(in thousands)
December 31
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Balance at beginning of year $17,610 $18,190 $16,888 $15,088 $14,630
Charge-offs:
Commercial, financial and agricultural (3,925) (2,385) (906) (1,625) (1,213)
Real estate-mortgage (1,142) (1,375) (252) (323) (367)
Installment loans to individuals (7,185) (7,709) (4,594) (3,063) (2,540)
-----------------------------------------------------------------------
Totals (12,252) (11,469) (5,752) (5,011) (4,120)
Recoveries:
Commercial, financial and agricultural 81 297 1,219 794 157
Real estate-mortgage 301 43 149 191 44
Installment loans to individuals 1,349 1,283 1,103 814 768
-----------------------------------------------------------------------
Totals 1,731 1,623 2,471 1,799 969
-----------------------------------------------------------------------
Net charge-offs (10,521) (9,846) (3,281) (3,212) (3,151)
Provision for loan losses 19,286 8,481 4,064 5,012 3,609
Balance of acquired institution 738 785 519 - -
-----------------------------------------------------------------------
Balance at end of year $27,113 $17,610 $18,190 $16,888 $15,088
=======================================================================
As a Percent of Average Total Loans
Net charge-offs 0.59% 0.58% 0.23% 0.25% 0.26%
Provision for loan losses 1.08 0.51 0.28 0.39 0.30
As a Percent of Nonperforming and Potential Problem Loans
Allowance for loan losses 168.55% 118.59% 136.97% 142.67% 126.94%
14
Table Eight
Nonaccrual, Past-Due And Restructured Loans
(in thousands)
December 31
1999 1998 1997 1996 1995
----------------------------------------------------------------------
Nonaccrual loans $ 9,553 $ 8,844 $ 7,801 $ 5,200 $ 7,081
Accruing loans past due 90 days or more 5,830 5,126 5,149 6,402 4,664
Restructured loans 703 879 331 235 141
-----------------------------------------------------------------------
$16,086 $14,849 $13,281 $11,837 $11,886
=======================================================================
During 1999, the Company recognized approximately $1.08 million of interest
income received in cash on nonaccrual and restructured loans. Approximately
$1.99 million of interest income would have been recognized during the year if
such loans had been current in accordance with their original terms. There were
no commitments to provide additional funds on nonaccrual, restructured, or other
potential problem loans at December 31, 1999.
Interest on loans is accrued and credited to operations based upon the principal
amount outstanding. The accrual of interest income is generally discontinued
when a loan becomes 90 days past due as to principal or interest unless the loan
is well collateralized and in the process of collection. When interest accruals
are discontinued, interest credited to income in the current year that is unpaid
and deemed uncollectible is charged to operations. Prior year interest accruals
that are unpaid and deemed uncollectible are charged to the allowance for loan
losses, provided that such amounts were specifically reserved.
Table Nine
Allocation Of The Allowance For Loan Losses
(in thousands)
December 31
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------------
Commercial, financial and
agricultural $14,307 31% $ 6,270 29% $ 7,284 31% $ 6,549 33% $ 5,931 32%
Real estate-mortgage 5,874 50 6,227 49 5,575 45 5,604 43 4,930 42
Installment loans to 6,932 19 5,113 22 5,331 24 4,735 24 4,227 26
individuals
---------------------------------------------------------------------------------------------------
$27,113 100% $17,610 100% $18,190 100% $16,888 100% $15,088 100%
===================================================================================================
The portion of the allowance for loan losses that is not specifically allocated
to individual credits has been apportioned among the separate loan portfolios
based on the risk of each portfolio.
15
Loans Held For Sale
At December 31, 1999, loans held for sale represent mortgage loans the
Company has either purchased or originated with the intent to sell and includes
traditional fixed-rate and junior lien mortgage loans. Certain traditional
fixed-rate mortgages are originated by the Company, with the intent to sell,
servicing released, in the secondary market. This product line enables the
Company to provide conventional, fixed-rate mortgage products to its customers,
but minimize the interest-rate risk associated with fixed-rate loans. At
December 31, 1999 and 1998, conventional mortgage loans represented $33 million
or 27.67% and $45 million or 18.2% of the reported balance of loans held for
sale.
During 1999, the Company merged its correspondent lending division into its
broker division and consolidated its separate loan origination platforms into
one retail operation. These divisions, respectively, purchase and originate
junior lien and similar mortgage loans for sale. Generally, these loans are used
by the borrower to finance property improvements or to consolidate personal
debt. With the restructuring of these divisions during 1999, the Company
significantly reduced the volume of origination and acquisition of this loan
product and terminated its loan securitization program after its May 1999
securitization.
Through formal underwriting guidelines and quality control procedures, the
Company has implemented policies and procedures to mitigate the risks associated
with the junior lien mortgage product, including concentration risk, credit
risk, and interest rate risk. Such policies and procedures addressed lending
issues related to the creditworthiness of the borrower, credit scores,
debt-to-income ratios, borrower credit histories, and other pertinent factors.
Due to the nature of the junior lien mortgage loan, less emphasis is placed on
the value of the underlying collateral, although property appraisals may be
required for certain loans.
As previously discussed, the Company has signed a binding term sheet to sell
its origination and servicing divisions. Expected to be consummated during the
second quarter of 2000, the sale of these operations, if completed, will further
reduce the Company's participation in the specialty finance industry.
During 1999, the Company originated $343 million and purchased $229 million
in loans held for sale and sold $708 million during the same period. This
compares to originations of $696 million, purchases of $755 million, and sales
of $1.36 billion during 1998.
Loan Securitizations
From December 1997 through May 1999, the Company completed six
securitizations of junior lien mortgage loans. The securitization program was
initiated by the Company as a means to mitigate the risk of originating and
acquiring this loan product and to continue the growth of the Company's loan
servicing portfolio. Each of the securitized pools is serviced by the Company's
mortgage loan servicing division.
By securitizing these loans, the Company effectively removed the loans from
its balance sheet by creating an investment security, or securities, supported
by the cash flows generated by these loans, and selling the resulting investment
security or securities to independent third parties. As part of this process,
the Company provided credit enhancement, in the form of overcollateralization,
with respect to the investment security created. As a result, the Company
maintains a certain level of credit, prepayment and interest rate risk related
to these loans. The risk maintained by the Company, however, is less than that
which would be maintained had the Company held these loans on its balance sheet
until the loans matured.
In return for this risk exposure, the Company expects to receive future
income from each securitization that is determined as a function of the "excess
spread" derived from the securitized loans. The "excess spread", generally, is
calculated as the difference between (A) the interest at the stated rate paid by
borrowers and (B) the sum of pass-through interest paid to third-party investors
and various fees, including trustee, insurance, servicing, and other similar
costs. The "excess spread" represents income to be recognized by the Company
over the life of the securitized loan pool.
In 1999, the Company sold $261.51 million of junior lien mortgage loans in
one securitization transaction, while in 1998, the Company sold $463.13 million
of junior lien mortgage loans in four securitization transactions. During 1999,
cash proceeds from the securitization of junior lien mortgage loans totaled
$238.16 million, with a pre-tax gain of approximately $3.88 million recognized.
During 1998, cash proceeds from securitizations of junior lien mortgage loans
totaled $430.03 million, with pre-tax gains of $8.60 million recognized. As of
December 31, 1999 and 1998, the Company reported retained interests in these
securitized loan pools of approximately $76.96 million and $65.62 million,
respectively, including accrued interest. Assumptions used to estimate the
retained interest at December 31, 1999, include weighted average cumulative
defaults approximating 13.61%, prepayment rates of 15-21% CPR, and a
weighted-average discount rate of 14.00%. Management monitors the actual default
and prepayment rates of each securitized pool on a monthly basis, in addition to
the outstanding pool balance, to ensure the rates used to estimate the retained
interest are still reasonable. Quarterly, management re-forecasts expected cash
flows for each securitization, updating significant assumptions as necessary. As
a result of re-forecasting cash flows during 1999, the estimated fair value of
the total retained interests has been reduced by $21.57 million, pre-tax. Such
fair value declines, deemed to be temporary, have been recorded through the
Other Comprehensive Income section with Stockholders' Equity. Adjustments to the
estimated fair value of the retained interests are the result of both actual
16
performance of the underlying collateral pools and revised expected timing of
the receipt of cash flows by the Company. Although a fair value reduction has
been recorded, re-forecasted cash flows as of December 31, 1999 projected
undiscounted cash flows to be received by the Company are 1.81 times the total
retained interest values, before fair value adjustments. Subsequent to the May
1999 securitization, management effectively terminated its loan securitizaton
program.
Loan Servicing
City Mortgage Services, a division of City National Bank with operations in
West Virginia, California and Texas, specializes in servicing sub-prime and
other non-conforming loans, home improvement and home equity loans and similar
products. At December 31, 1999 and 1998, City Mortgage Services maintained a
servicing portfolio of $1.78 billion and $1.98 billion, respectively. Of the
total servicing portfolio, $1.69 billion and $1.77 billion represented loans
serviced for others at December 31, 1999 and 1998, respectively. Loans serviced
for others are not included in the Consolidated Balance Sheets of the Company.
The Company has recorded mortgage loan servicing rights of $9.84 million and
$8.87 million at December 31, 1999 and 1998, respectively, associated with the
right to service mortgage loans for others. Included in Other Assets in the
Consolidated Balance Sheets, the recorded value of mortgage servicing rights is
assessed quarterly to determine if the value of those rights has become impaired
during the period. In doing so, management estimates the present value of future
net cash flows to be derived from its servicing activities. Factors included in
the impairment analysis include anticipated servicing income, costs associated
with servicing the portfolio, discount rates, and loan prepayment and default
rates. As of December 31, 1999, management has determined, based on this
analysis, that the recorded value of its servicing rights is fairly stated and
there is no impairment in that value.
Certificates Of Deposit
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1999, are summarized as follows:
Table Ten
(in thousands)
Amounts Percentage
---------------------------------------
Three months or less $ 59,877 27
Over three months through six months 52,338 23
Over six months through twelve months 56,878 26
Over twelve months 53,832 24
---------------------------------------
Total $ 222,925 100%
=======================================
Capital Resources
During 1999, the Company's stockholders' equity decreased $21.52 million or
9.78%, from $220.06 million at December 31, 1998 to $198.54 million at December
31, 1999. This decline was primarily the result of a $15.20 million increase in
Accumulated Other Comprehensive Losses during 1999. Additionally, the Company
paid dividends to its shareholders of $13.47 million and recorded net income of
$6.21 million, resulting in a $7.26 million decline in stockholders' equity.
The increase in Accumulated Other Comprehensive Losses was attributable to a
$12.41 million, after tax, write down in the fair value of retained interests
recorded during 1999. Additionally, fair value adjustments within the Company's
available-for-sale securities portfolio represented the remaining $2.79 million
increase in Accumulated Other Comprehensive Losses in 1999.
During 1998, the Company's consolidated stockholders' equity decreased 0.10%
from $220.28 million at December 31, 1997 to $220.06 million at December 31,
1998. This decrease was largely due to the impact of the Company's merger with
Horizon Bancorp. After fourth quarter charges to earnings, the Company reported
$5.23 million net income for 1998. However, prior to the merger, both companies
paid approximately $12.17 million in cash dividends to their respective
shareholders. Additionally, the Company experienced a $2.75 million decline in
Other Comprehensive Income, primarily the result of declines in the fair market
value of the Company's available-for-sale securities portfolio. During 1998, the
Company repurchased approximately 111,000 shares of its outstanding common stock
at an average price of $43.24 per share, while Horizon, prior to the merger,
repurchased approximately 71,000 shares of its common stock. Together, treasury
stock transactions resulted in an additional $6.99 million reduction in
stockholders' equity. Combined, the net effect of net income less dividends
paid, declines in Other Comprehensive Income and treasury stock acquisitions
resulted in a net decrease to consolidated equity of approximately $16.67
million. This net decline was partially offset by a $15.77 million increase to
equity resulting from the Company's acquisitions of Del Amo, Jarrett/Aim
17
Communications, Morton Specialty Insurance Partners, Citynet Corporation, and
MarCom, Inc. Each of these transactions, accounted for under the purchase
accounting method, involved the issuance of the Company's common stock and,
therefore, resulted in increases to consolidated equity.
Regulatory guidelines require the Company to maintain a minimum total
capital to risk-adjusted assets ratio of 8 percent, with at least one-half of
capital consisting of tangible common stockholders' equity and a minimum Tier I
leverage ratio of 4 percent. At December 31, 1999, the Company's total capital
to risk-adjusted assets ratio was 10.97% and its Tier I capital ratio was 9.28%,
compared to 12.00% and 10.60%, respectively, at December 31, 1998. The Company's
leverage ratio at December 31, 1999 and 1998 was 8.54% and 9.99%, respectively.
Similarly, the Company's banking subsidiaries are also required to maintain
minimum capital levels as set forth by various regulatory agencies. Under
capital adequacy guidelines, the banking subsidiaries are required to maintain
minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and
4.00%, respectively. To be classified as "well capitalized," the banking
subsidiaries must maintain total capital, Tier I capital, and leverage ratios of
10.00%, 6.00%, and 5.00%, respectively. As of December 31, 1999, the Company's
lead bank, City National, reported total capital, Tier I capital, and leverage
ratios of 11.81%, 10.77%, and 10.13%, respectively. As of December 31, 1998,
City National, reported total capital, Tier I capital, and leverage ratios of
10.70%, 10.10%, and 8.90%, respectively. As of December 31, 1999, the Company
and each of its banking subsidiaries satisfied capital requirements as
established by regulatory authorities to be categorized as well capitalized.
During 1998, the Company created two separate special-purpose statutory
trust subsidiaries which sold trust preferred securities generating gross
proceeds of $87.50 million. Pursuant to rulings released in 1996 by the Federal
Reserve Board, the Company's primary regulatory authority, the Company has
included the trust preferred securities in its regulatory capital ratio
computations. At December 31, 1999 and 1998, $72.96 million and $72.02 million,
respectively, of trust preferred securities are included in the Company's Tier I
capital, with the remaining $14.54 million and $15.48 million, respectively,
added to the Company's total regulatory capital. Proceeds from the issuance of
the trust preferred securities were used for general corporate purposes,
including, but not limited to, repayment of long-term debt and financing
activities within the mortgage banking business segment.
Anticipated improvements in consolidated operating results, effective risk
management and expected improvements in asset quality have been, and will
remain, the key elements in maintaining and improving the Company's capital
position. Including the proposed sale of the specialty finance origination and
servicing divisions, the Company has initiated several re-organization plans
that are expected to improve the overall, long-term profitability of the
Company, which, if completed, will also improve its capital position.
Year 2000
The Company's technology systems operated without interruption over the Year
2000 date change. Management continues to monitor its systems and those of its
third party service providers and significant customers into 2000, as several
additional important dates in the Year 2000 approach. On-going monitoring of
Year 2000 issues are consistent with the Company's overall Year 2000 strategic
plan and in accordance with guidelines established by the Company's regulatory
authorities.
Inflation
Since the assets and liabilities of the Company are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of banks is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
Non-financial assets, such as premises and equipment, comprise a relatively
small percentage of the Company's total assets. Therefore, inflation is less a
factor to the Company than it may be for non-financial entities. However, as the
rate of inflation increases, there generally could be a negative impact to the
Company, such as increases in operating costs. As operating costs rise, product
repricing and effective management of the Company's interest rate environment
are used to manage the impact of rising costs.
18
Report Of Independent Auditors
Board of Directors and Stockholders
City Holding Company
We have audited the accompanying consolidated balance sheets of City Holding
Company and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
City Holding Company and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 1, 2000, except for Note Seven, as
to which the date is April 10, 2000
19
Consolidated Balance Sheets
City Holding Company And Subsidiaries
December 31
1999 1998
------------------------------------------
(in thousands)
Assets
Cash and due from banks $ 120,122 $ 87,866
Federal funds sold 1,990 31,911
------------------------------------------
Cash and Cash Equivalents 122,112 119,777
Securities available for sale, at fair value 381,112 356,659
Securities held-to-maturity (approximate fair value at December 31, 1998 - $40,539) - 39,063
Loans:
Gross loans 1,886,114 1,715,929
Allowance for possible loan losses (27,113) (17,610)
------------------------------------------
Net Loans 1,859,001 1,698,319
Loans held for sale 118,025 246,287
Retained interests 76,963 65,623
Premises and equipment 66,119 71,094
Accrued interest receivable 18,149 19,358
Other assets 151,009 89,824
------------------------------------------
Total Assets $ 2,792,490 $ 2,706,004
==========================================
Liabilities
Deposits:
Noninterest-bearing $ 246,555 $ 303,421
Interest-bearing 1,709,215 1,760,994
------------------------------------------
Total Deposits 1,955,770 2,064,415
Short-term borrowings 386,719 183,418
Long-term debt 116,000 102,719
Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts
holding solely subordinated debentures of City Holding Company 87,500 87,500
Other liabilities 47,959 47,893
------------------------------------------
Total Liabilities 2,593,948 2,485,945
Stockholders' Equity
Preferred stock, par value $25 per share: authorized - 500,000 shares: none issued
Common stock, par value $2.50 per share: authorized - 50,000,000 shares; issued and
outstanding at Demember 31, 1999 and 1998: 16,879,815 and 16,820,276 shares,
including 9,646 and 10,000 shares in treasury, respectively 42,199 42,051
Capital surplus 59,164 58,365
Retained earnings 112,951 120,209
Cost of common stock in treasury (285) (274)
Accumulated other comprehensive loss (15,487) (292)
------------------------------------------
Total Stockholders' Equity 198,542 220,059
------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,792,490 $ 2,706,004
==========================================
See notes to consolidated financial statements.
20
Consolidated Statements Of Income
City Holding Company And Subsidiaries
Year Ended December 31
1999 1998 1997
--------------------------------------------------------
(in thousands, except per share data)
Interest Income
Interest and fees on loans $ 168,726 $ 170,549 $ 147,760
Interest on investment securities:
Taxable 17,675 17,189 19,840
Tax-exempt 5,032 4,955 5,077
Other interest income 4,120 3,987 489
--------------------------------------------------------
Total Interest Income 195,553 196,680 173,166
Interest Expense
Interest on deposits 71,464 74,432 63,086
Interest on short-term borrowings 11,436 9,677 9,898
Interest on long-term debt 6,219 6,223 3,028
Interest on trust preferred securities 8,014 3,005 -
--------------------------------------------------------
Total Interest Expense 97,133 93,337 76,012
--------------------------------------------------------
Net Interest Income 98,420 103,343 97,154
Provision for loan losses 19,286 8,481 4,064
--------------------------------------------------------
Net Interest Income After Provision for Loan Losses 79,134 94,862 93,090
Other Income
Investment securities (losses) gains (9,897) 7 8
Service charges 10,074 9,738 8,245
Mortgage loan servicing fees 22,068 19,058 11,933
Net origination fees on junior-lien mortgages 4,292 14,489 2,458
Gain on sale of loans 6,600 14,238 4,392
Other income 26,398 14,893 5,577
--------------------------------------------------------
Total Other Income 59,535 72,423 32,613
Other Expenses
Salaries and employee benefits 56,530 56,653 41,592
Occupancy, excluding depreciation 11,376 14,016 6,350
Depreciation 11,822 10,313 6,597
Advertising 12,297 27,827 4,935
Other expenses 38,589 46,749 25,425
--------------------------------------------------------
Total Other Expenses 130,614 155,558 84,899
--------------------------------------------------------
Income Before Income Taxes 8,055 11,727 40,804
Income taxes 1,842 6,493 14,513
--------------------------------------------------------
Net Income $ 6,213 $ 5,234 $ 26,291
========================================================
Basic earnings per common share $ 0.37 $ 0.31 $ 1.60
========================================================
Diluted earnings per common share $ 0.37 $ 0.31 $ 1.60
========================================================
Average common shares outstanding:
Basic 16,841 16,799 16,428
========================================================
Diluted 16,841 16,885 16,474
========================================================
See notes to consolidated financial statements.
21
Consolidated Statements Of
Changes In Stockholders' Equity
City Holding Company And Subsidiaries
Common Accumulated
Stock Other Total
(Par Capital Retained Comprehensive Treasury Stockholders'
Value) Surplus Earnings Income Stock Equity
-----------------------------------------------------------------------------
(in thousands)
Balances at December 31, 1996 $ 39,851 $ 38,638 $ 110,122 $ 648 $ (475) $ 188,784
Comprehensive income:
Net income - - 26,291 - - 26,291
Other comprehensive income, net of deferred
income taxes of $1,138:
Unrealized gain on securities of $1,791, net
of reclassification adjustment for gains - - - 1,786 - 1,786
included in net income of $5
---------------
Total comprehensive income 28,077
Cash dividends declared:
City ($0.73 a share) - - (4,486) - - (4,486)
Horizon - - (6,935) - - (6,935)
Exercise of 2,629 stock options 13 81 - - - 94
Sale of 2,511 shares of treasury stock - 13 - - 67 80
Purchase of 2,300 shares of treasury stock - - - - (77) (77)
Purchase of shares of treasury stock by Horizon - - - - (2,763) (2,763)
Common stock issued in acquisitions 860 12,974 - - - 13,834
Issuance of stock for Old National 1,202 298 2,150 19 - 3,669
-----------------------------------------------------------------------------
Balances at December 31, 1997 41,926 52,004 127,142 2,453 (3,248) 220,277
Comprehensive income:
Net income - - 5,234 - - 5,234
Other comprehensive income, net of deferred
income taxes of $(1,998):
Unrealized loss on securities of $2,749, net
of reclassification adjustment for gains - - - (2,745) - (2,745)
included in net income of $4
---------------
Total comprehensive income 2,489
Cash dividends declared:
City ($0.77 a share) - - (5,105) - - (5,105)
Horizon - - (7,062) - - (7,062)
Exercise of 36,768 stock options 82 422 - - 171 675
Purchase of 111,018 shares of treasury stock - - - - (4,873) (4,873)
Purchase of shares of treasury stock by Horizon - - - - (2,114) (2,114)
Common stock issued in acquisitions 807 14,965 - - - 15,772
Retirement of 108,396 shares of common stock held in (271) (4,396) - - 4,667 -
treasury
Retirement of shares of common stock held in (493) (4,630) - - 5,123 -
treasury by Horizon
-----------------------------------------------------------------------------
Balances at December 31, 1998 42,051 58,365 120,209 (292) (274) 220,059
Comprehensive loss:
Net income - - 6,213 - - 6,213
Other comprehensive loss, net of deferred income
taxes of $(10,082): - - - - - -
Unrealized loss on securities and retained
interests of $15,257, net of
reclassification adjustment for gains
included in net income of $62 - - - (15,195) - (15,195)
---------------
Total comprehensive loss (8,982)
Cash dividends declared ($0.80 a share) - - (13,471) - - (13,471)
Exercise of 7,686 stock options 82 184 - - 255 521
Purchase of 11,999 shares of treasury stock - - - - (398) (398)
Issuance of contingently issuable common stock 66 615 - - 132 813
-----------------------------------------------------------------------------
Balances at December 31, 1999 $ 42,199 $ 59,164 $ 112,951 $ (15,487) $ (285) $ 198,542
=============================================================================
See notes to consolidated financial statements.
22
Consolidated Statements Of Cash Flows
City Holding Company And Subsidiaries
Year Ended December 31
1999 1998 1997
--------------------------------------------------------
(in thousands)
Operating Activities
Net income $ 6,213 $ 5,234 $ 26,291
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net amortization 5,674 2,647 1,776
Provision for depreciation 11,822 10,313 6,599
Provision for probable loan losses 19,286 8,481 4,064
Deferred income tax benefit (9,198) (3,011) (909)
Loans originated for sale (343,755) (695,576) (97,465)
Purchases of loans held for sale (229,148) (754,703) (797,537)
Proceeds from loans sold 707,765 1,364,657 850,742
Realized gains on loans sold (6,600) (14,238) (4,392)
Increase in retained interests (11,340) (61,260) (4,360)
Realized investment securities losses (gains) 9,897 (7) (8)
Decrease (increase) in accrued interest receivable 1,310 (3,515) (1,763)
(Increase) decrease in other assets (56,483) 3,230 (27,565)
Increase in other liabilities 145 6,547 9,193
--------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 105,588 (131,201) (35,334)
Investing Activities
Proceeds from maturities and calls of securities held-to-maturity 27 3,390 4,565
Purchases of securities held-to-maturity - (898) -
Proceeds from sales of securities available for sale 83,185 33,930 87,139
Proceeds from maturities and calls of securities available for sale 24,304 146,140 79,912
Purchases of securities available for sale (105,785) (201,487) (102,523)
Net increase in loans (175,061) (119,225) (128,169)
Net cash paid in branch sales (56,104) - -
Realized gain on branch sales (8,883) - -
Net cash acquired (paid) in acquisitions 7,409 2,584 (4,516)
Purchases of premises and equipment (7,944) (26,446) (11,840)
--------------------------------------------------------
Net Cash Used in Investing Activities (238,852) (162,012) (75,432)
Financing Activities
Net (decrease) increase in noninterest-bearing deposits (22,178) 52,960 (3,262)
Net (decrease) increase in interest-bearing deposits (30,323) 129,083 79,733
Net increase in short-term borrowings 191,168 10,529 52,940
Proceeds from long-term debt 57,999 87,917 41,252
Repayment of long-term debt (47,719) (65,700) -
Net proceeds from issuance of trust preferred securities - 84,148 -
Purchases of treasury stock (398) (6,987) (2,840)
Proceeds from sales of treasury stock - - 80
Exercise of stock options 521 675 94
Cash dividends paid (13,471) (12,167) (11,421)
--------------------------------------------------------
Net Cash Provided by Financing Activities 135,599 280,458 156,576
--------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2,335 (12,755) 45,810
Cash and cash equivalents at beginning of year 119,777 132,532 86,722
--------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 122,112 $ 119,777 $ 132,532
========================================================
See notes to consolidated financial statements.
23
Notes To Consolidated Financial Statements
City Holding Company And Subsidiaries
- - - - - - - - -------------------------------------------------------------------------------
Note One
Summary Of Significant Accounting And Reporting Policies
- - - - - - - - -------------------------------------------------------------------------------
Summary of Significant Accounting and Reporting Policies: The accounting and
reporting policies of City Holding Company and its subsidiaries (the Company)
conform with accounting principles generally accepted in the United States and
require management to make estimates and develop assumptions that affect the
amounts reported in the financial statements and related footnotes. Actual
results could differ from management's estimates. The following is a summary of
the more significant policies.
Principles of Consolidation: The consolidated financial statements include
the accounts of City Holding Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of Principal Markets and Services: The Company is a multi-bank
holding company headquartered in Charleston, West Virginia. The Company's
banking subsidiaries are retail and consumer oriented community banks with
offices in West Virginia, Ohio, and California. The nonbanking subsidiaries of
the Company are comprised of a full service securities brokerage and investment
advisory company headquartered in Charleston, two separate special-purpose
statutory trusts created to issue trust preferred securities and an inactive
mortgage banking company.
Cash and Due from Banks: The Company considers cash and due from banks and
federal funds sold as cash and cash equivalents.
Securities: Management determines the appropriate classification of
securities at the time of purchase. If management has the intent and the Company
has the ability at the time of purchase to hold debt securities to maturity,
they are classified as investment securities and are stated at amortized cost,
adjusted for amortization of premiums and accretion of discounts. Debt
securities for which the Company does not have the intent or ability to hold to
maturity are classified as available for sale along with the Company's
investment in equity securities. Securities available for sale are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
comprehensive income. Securities classified as available for sale include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk, and other factors.
The specific identification method is used to determine the cost basis of
securities sold.
Loans: Interest income on loans is accrued and credited to operations based
upon the principal amount outstanding, using methods which generally result in
level rates of return. The accrual of interest income generally is discontinued
when a loan becomes 90 days past due as to principal or interest. When interest
accruals are discontinued, unpaid interest recognized in income in the current
year is reversed, and interest accrued in prior years is charged to the
allowance for loan losses. Management may elect to continue the accrual of
interest when the estimated net realizable value of collateral exceeds the
principal balance and related accrued interest, and the loan is in process of
collection.
Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time, and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Loans Held for Sale: Loans held for sale represent mortgage loans the
Company has either purchased or originated with the intent to sell in the
secondary market and are carried at the lower of aggregate cost or estimated
fair value.
Mortgage Servicing Rights: The value of mortgage servicing rights are
capitalized and amortized in proportion to and over the period of estimated net
servicing revenues. Impairment of mortgage servicing rights is assessed based on
the fair value of those rights. To determine fair value, the Company estimates
the present value of future cash flows incorporating various assumptions
including servicing income, cost of servicing, discount rates, prepayment
speeds, and default rates. For purposes of measuring impairment, the mortgage
servicing rights are stratified based upon predominant risk characteristics of
the underlying loans.
Retained Interest: The Company retains a financial interest in its
securitized loan sales. This retained interest is generally comprised of two
components: excess spread receivable and overcollateralization. Excess spread
receivable represents the present value of the excess cash flows generated by
the securitized loans. The excess cash flows generally represent the difference
between interest at the stated rate paid by borrowers and the sum of (A)
pass-through interest paid to third-party investors and (B) on-going
securitization expenses, including servicing, insurance, and trustee costs. The
Company determines the present value of the excess cash flows at the time each
securitization closes, based on valuation assumptions, including default rates,
prepayment rates, and discount rates.
Additionally, the Company provides credit enhancement with respect to the
securities issued, in the form of overcollateralization. The initial
overcollateralization will generally be required to increase to a pre-determined
amount, at which time the excess cash flows discussed above will be released,
periodically, to the Company. The initial overcollateralization amount will
reach the required overcollateralization level through the application of
monthly excess cash to accelerate payment of the note(s). Generally, the
24
required overcollateralization amount will decrease or increase, subject to
pre-established requirements based on the performance of the collateral loans.
The Company determines the present value of cash flows to be received by the
Company related to the overcollateralization feature at the time each
securitization closes, based on the same assumptions previously discussed for
the excess spread component.
The retained interest is accounted for similar to an available-for-sale
security, and as such, the recorded value is adjusted, quarterly, to its
estimated fair value with the related increase or decrease in fair value
recorded as a separate component of stockholders' equity, net of tax. If the
decrease in fair value is determined to be permanent, the impairment is charged
to operations. Because the retained interest is uncertificated, the Company has
included the recorded value of the retained interest in Other Assets in the
consolidated balance sheet.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb losses in the loan portfolio.
Management's determination of the adequacy of the allowance for loan losses is
based upon management's evaluation of individual credits in the loan portfolio,
historical loan loss experience, current economic conditions, and other relevant
factors. This determination is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. The
allowance for loan losses related to loans considered to be impaired is
generally evaluated based on the discounted cash flows using the impaired loan's
initial effective interest rate or the fair value of the collateral for certain
collateral dependent loans.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives of the assets. Generally,
estimated useful lives of premises and furniture, fixtures, and equipment do not
exceed 30 and 7 years, respectively.
Intangibles: Intangible assets, not including mortgage servicing rights, are
comprised of goodwill and core deposits and are included in other assets in the
consolidated balance sheets. Goodwill is being amortized on a straight-line
basis over a 10 to 15 year period and core deposits are being amortized using
accelerated methods over 10 year estimated useful lives.
The carrying amount of goodwill is reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as indicated based on the estimated undiscounted cash flows of
the entity acquired over the remaining amortization period, the carrying amount
of the goodwill is reduced by the estimated shortfall of cash flows discounted
over the remaining amortization period.
Advertising: Advertising costs are expensed as incurred.
Income Taxes: The consolidated provision for income taxes is based upon
reported income and expense. Deferred income taxes (included in other assets)
are provided for temporary differences between financial reporting and tax bases
of assets and liabilities. The Company files a consolidated income tax return.
The respective subsidiaries generally provide for income taxes on a separate
return basis and remit amounts determined to be currently payable to the Parent
Company.
Stock-Based Compensation: As permitted, the Company has elected to follow
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its employee stock options. Because the exercise price of the
Company's employee stock options granted equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Basic and Diluted Earnings per Common Share: Basic earnings per share is
computed by dividing net income by the weighted-average number of shares of
common stock outstanding, while diluted earnings per share is computed by
dividing net income by the weighted-average number of shares outstanding
increased by the number of shares of common stock which would be issued assuming
the exercise of stock options and other common stock equivalents. Stock options
and common stock equivalents had no effect on average shares outstanding for
purposes of computing diluted earnings per share for 1999. The incremental
shares related to stock options were 77,000 and 42,000 in 1998, and 1997, while
other common stock equivalents were 9,000 and 4,000 in 1998 and 1997.
New Accounting Pronouncements: In June 1998, the FASB issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The
provisions of this statement require that derivative instruments be carried at
fair value on the balance sheet and allows hedge accounting when specific
criteria are met. The provisions of this statement become effective for
quarterly and annual reporting beginning January 1, 2001. The impact of adopting
the provisions of this statement on the Company's financial position or results
of operations subsequent to the effective date is not currently estimable and
will depend on the financial position of the Company and the nature and purpose
of the derivative instruments in use by management at that time.
Statements of Cash Flows: Cash paid for interest, including long-term debt,
was $98.71 million, $90.27 million, and $74.90 million in 1999, 1998, and 1997,
respectively. Cash paid for income taxes was $9.75 million, $14.0 million, and
$15.0 million in 1999, 1998, and 1997, respectively.
25
Reclassifications: Certain amounts in the 1998 and 1997 financial
statements have been reclassified to conform to the 1999 presentation. Such
reclassifications had no impact on net income or stockholders' equity.
- - - - - - - - -------------------------------------------------------------------------------
Note Two
Subsequent Events (Unaudited)
- - - - - - - - -------------------------------------------------------------------------------
On March 3, 2000, the Company announced that City National Bank of West
Virginia ("City National"), a wholly-owned subsidiary of the Company, had signed
a binding term sheet to sell its specialty finance mortgage servicing and
origination operations. In exchange, City National would receive notes
receivable of approximately $42 million. If this transaction is completed, City
National expects to recognize a pre-tax loss of between $2 million and $5
million, although the exact amount would not be determinable until the
transaction is completed. The sale is scheduled to be consummated in the second
quarter of 2000 pending regulatory approval.
- - - - - - - - -------------------------------------------------------------------------------
Note Three
Acquisitions
- - - - - - - - -------------------------------------------------------------------------------
Effective July 1, 1999, the Company acquired Frontier Bancorp and its
wholly-owned subsidiary, Frontier State Bank (collectively, "Frontier").
Frontier, headquartered in Redondo Beach, California, reported total assets and
total deposits of approximately $88 million and $71 million, respectively, at
June 30, 1999. Pursuant to the merger agreement, the Company paid approximately
$15.13 million cash for 100% of the outstanding common stock of Frontier
Bancorp. This transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations have been included in the
consolidated totals from the date of acquisition. Due to the immaterial impact
on the Company's financial statements, no proforma information has been included
herein.
On December 31, 1998, the Company merged with Horizon Bancorp, Inc.
(Horizon), a $1 billion asset bank holding company headquartered in Beckley,
West Virginia, in a transaction accounted for as a pooling of interests. The
Company issued 10.2 million shares of common stock to the shareholders of
Horizon based upon an exchange ratio of 1.111 shares of the Company's common
stock for each outstanding share of Horizon common stock. The Company's
historical consolidated financial statements were restated to reflect this
transaction.
Following is an analysis presenting the results of operations for 1997 of
the separate companies:
Net Interest Net Income per
Income Net Income Common Share
--------------------------------------------
Company $52,105 $12,464 $ 2.02
Horizon 45,049 13,827 1.49
--------------------------------------------
Combined $97,154 $26,291 $ 1.60
============================================
Merger expenses incurred in 1998 as a result of the merger with Horizon
approximated $13.5 million and consisted of: advisory and professional fees of
$4.8 million, employee severance costs of $3.2 million, data processing contract
terminations of $1.7 million, and other miscellaneous expenses of $3.8 million.
Included in the miscellaneous expenses is a $2.5 million write-down of goodwill,
determined to be impaired as a result of the merger, related to a branch
previously acquired by Horizon.
In April 1998, the Company acquired Del Amo Savings Bank, FSB ("Del Amo").
Del Amo, headquartered in Torrance, California, reported total assets and total
deposits of approximately $116 million and $102 million, respectively, at the
date of acquisition. This transaction was accounted for under the purchase
method of accounting. Accordingly, the results of operations have been included
in the consolidated totals from the date of acquisition. Due to the immaterial
impact on the Company's financial statements, no proforma information has been
included for the information provided herein.
In January 1998, City National acquired Jarrett/Aim Communications, Inc.
(Jarrett/Aim), a printing and direct mail corporation. In March 1998, City
National acquired Morton Specialty Insurance Partners, Inc. (Morton Insurance),
an insurance brokerage that offers property and casualty insurance and bonding
programs to established commercial and industrial clients, primarily in
energy-related industries. In April 1998, City National acquired Citynet
Corporation (Citynet) and MarCom, Inc. (MarCom), an internet service provider
and web site development firm, respectively. These transactions were accounted
for under the purchase method of accounting. Accordingly, the results of
operations attributable to these transactions have been included in the
consolidated totals from the dates of the acquisitions. The assets of
Jarrett/Aim, Morton Insurance, Citynet, and MarCom represent less than 1% of the
total assets of the Company. Accordingly, no proforma information has been
included for the information provided herein.
Intangible assets arising from purchase business combinations noted above
and in the previous years consist primarily of goodwill and core deposits which
have an aggregate unamortized balance at December 31, 1999 and 1998, of $46.19
million and $38.37 million, respectively. Amortization of goodwill and core
deposits approximated $3.12 million, $3.08 million (excluding the fourth quarter
1998 write-down of goodwill determined to be impaired) and $1.52 million during
the years ended December 31, 1999, 1998, and 1997, respectively.
26
- - - - - - - - -------------------------------------------------------------------------------
Note Four
Restrictions On Cash And Due From Banks
- - - - - - - - -------------------------------------------------------------------------------
Certain subsidiary banks are required to maintain an average reserve balance
with the Federal Reserve Bank. The average amount of the balance for the year
ended December 31, 1999, was approximately $54.81 million.
- - - - - - - - -------------------------------------------------------------------------------
Note Five
Investments
- - - - - - - - -------------------------------------------------------------------------------
During the fourth quarter of 1999, the Company recognized a pre-tax charge
of $10.00 million as a result of a determination that the Company's investment
in Altiva Financial Corporation ("Altiva") could no longer be supported as
"other than temporary". Factors that were considered that resulted in this
charge to earnings included the significant changes that have occurred within
the specialty finance industry in recent months and the dilution in the
Company's ownership position of Altiva as a result of a second recapitalization
completed by Altiva in December 1999. The $10.00 million pre-tax charge is
included in Investment securities (losses) gains in the Consolidated Statements
of Income.
Horizon maintained selected debt securities in a held-to-maturity
classification based on its management's intent and Horizon's ability to hold
such securities to maturity. On April 1, 1999, the Company reclassified those
securities from held-to-maturity to available for sale. This transfer was
consistent with the Company's Investment Portfolio accounting policies and
provides management with additional liquidity alternatives and more flexibility
in managing the Company's interest rate risk. At the date of transfer, the
amortized cost of those securities was $39.04 million and the unrealized gain on
those securities was $1.26 million.
Included in the Company's investment portfolio are structured notes with an
estimated fair value of $1.2 million and $1.4 million at December 31, 1999 and
1998, respectively. Such investments are used by management to enhance yields,
diversify the investment portfolio, and manage the Company's exposure to
interest rate fluctuations. These securities consist of federal agency
securities with an average maturity of approximately two years. Management
periodically performs sensitivity analyses to determine the Company's exposure
to fluctuation in interest rates of 3% and has determined that the structured
notes meet regulatory price sensitivity guidelines.
The aggregate carrying and approximate market values of securities follow.
Fair values are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
(in thousands)
December 31, 1999
Available-for-sale securities:
U.S. Treasury
securities and
obligations of U.S.
government $235,451 $ 48 $(5,968) $229,531
corporations and
agencies
Obligations of
states and 100,002 807 (1,666) 99,143
political
subdivisions
Mortgage-backed 5,732 37 (70) 5,699
securities
Other debt 5,605 34 (44) 5,595
securities
-------------------------------------------
Total Debt 346,790 926 (7,748) 339,968
Securities
Equity securities 41,179 108 (143) 41,144
-------------------------------------------
$387,969 $1,034 $(7,891) $381,112
===========================================
December 31, 1998 Available-for-sale securities:
U.S. Treasury
securities and
obligations of U.S.
government $244,706 $2,508 $ (413) $246,801
corporations and
agencies
Obligations of
states and 66,926 2,179 (103) 69,002
political
subdivisions
Mortgage-backed 11,102 199 (7) 11,294
securities
Other debt 8,565 292 - 8,857
securities
-------------------------------------------
Total Debt 331,299 5,178 (523) 335,954
Securities
Equity securities 27,083 357 (6,735) 20,705
-------------------------------------------
$358,382 $5,535 $ (7,258) $ 356,659
===========================================
Held-to-maturity
securities:
Obligations of
states and $39,063 $1,476 $ - $ 40,539
political ===========================================
subdivisions
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
Estimated
Fair
Cost Value
---------------------------
(in thousands)
Available-for-Sale
Due in one year or less $ 30,786 $ 30,826
Due after one year through five 230,583 225,857
years
Due after five years through ten 61,093 59,986
years
Due after ten years 18,596 17,600
---------------------------
341,058 334,269
Mortgage-backed securities 5,732 5,699
---------------------------
$346,790 $339,968
===========================
Gross gains of $113,000, $47,000, and $431,000, and gross losses of $10.01
million, $40,000, and $423,000, were realized on sales and calls of securities
during 1999, 1998, and 1997, respectively.
The book value of securities pledged to secure public deposits and for other
purposes as required or permitted by law approximated $252 million and $161
million at December 31, 1999 and 1998, respectively.
27
- - - - - - - - -------------------------------------------------------------------------------
Note Six
Loans
- - - - - - - - -------------------------------------------------------------------------------
The loan portfolio is summarized as follows:
December 31
1999 1998
-------------------------
(in thousands)
Commercial, financial and $ 589,116 $ 509,214
agricultural
Residential real estate 949,830 842,727
Installment loans to individuals 347,168 363,988
-------------------------
$1,886,114 $1,715,929
=========================
The Company grants portfolio loans to customers generally within the market
areas of its subsidiary banks. There is no significant concentration of credit
risk by industry or by related borrowers. There are no foreign loans outstanding
and highly leveraged loan transactions are insignificant.
Subsidiaries of the Company have granted loans to the officers and directors
of the Company and its subsidiaries, and to their associates. The loans were
made in the ordinary course of business and on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with unrelated persons and did not involve more than
normal risk of collectibility. The following presents the activity with respect
to related party loans during 1999 and 1998:
1999 1998
-------------------------
(in thousands)
Balance at January 1 $25,008 $47,233
Loans made 32,104 11,829
Principal payments received (14,809) (10,648)
Other changes - (23,406)
-------------------------
Balance at December 31 $42,303 $25,008
=========================
Amounts reported as Other Changes in the table above represent changes in
the composition of the Company's Board of Directors in 1998 as a result of the
merger of Horizon.
- - - - - - - - -------------------------------------------------------------------------------
Note Seven
Allowance for Loan Losses
- - - - - - - - -------------------------------------------------------------------------------
A summary of changes in the allowance for probable loan losses follows:
1999 1998 1997
-------------------------------
(in thousands)
Balance at January 1 $17,610 $18,190 $16,888
Provision for possible loan 19,286 8,481 4,064
losses
Charge-offs (12,252) (11,469) (5,752)
Recoveries 1,731 1,623 2,471
Balance of acquired 738 785 519
institution
-------------------------------
Balance at December 31 $27,113 $17,610 $18,190
===============================
On April 10, 2000, the Company recorded an additional loan loss reserve of
$6.00 million as of December 31, 1999. The additional reserve was recorded in
connection with a rountine examination of the Company's lead bank, City National
Bank of West Virginia, by the Office of the Comptroller of the Currency, and is
reflected in the Consolidated Financial Statements.
The recorded investment in loans that were considered impaired was $10.26
million and $9.13 million at December 31, 1999 and 1998, respectively. Included
in these amounts at December 31, 1999 and 1998, are $4.86 million and $4.04
million, respectively, of impaired loans for which the related allowance for
loan losses is $755,000 and $1.68 million, respectively, and $9.52 million and
$5.09 million of impaired loans that, as a result of write-downs or being well
secured, do not have an allowance for loan losses. The average recorded
investments in impaired loans during the years ended December 31, 1999, 1998 and
1997, were approximately $11.32 million, $9.39 million, and $8.44 million,
respectively.
- - - - - - - - -------------------------------------------------------------------------------
Note Eight
Loans Held for Sale
- - - - - - - - -------------------------------------------------------------------------------
As of December 31, 1999, the Company reported approximately $118.03 million
of loans held for sale, compared to $246.29 million of loans held for sale or
securitization at December 31, 1998. At December 31, 1999 and 1998, $85.36
million and $203.04 million, respectively, of total loans held for sale
represented junior lien and similar mortgage loans. The remaining $32.67 million
and $43.25 million at December 31, 1999 and 1998, respectively, represented
conventional, fixed rate mortgage loans.
Gain on sales of loans approximated $2.72 million, $5.64 million, and $3.31
million in 1999, 1998, and 1997, excluding gains recognized from securitizations
transacted by the Company. The gain on sales of loans is recorded net of the
change in the valuation allowance for loans held for sale, which approximated
$2.11 million, $4.70 million, and $2.10 million in 1999, 1998, and 1997,
respectively.
- - - - - - - - -------------------------------------------------------------------------------
Note Nine
Securitizations and Retained Interests
- - - - - - - - -------------------------------------------------------------------------------
In 1999, the Company sold $261.51 million of junior lien mortgage loans in
one securitization transaction, while in 1998, the Company sold $463.13 million
of junior lien mortgage loans in four securitization transactions. In 1997, the
Company sold $35.16 million of junior lien mortgage loans in one securitization
transaction.
During 1999, cash proceeds from the securitization of junior lien mortgage
loans totaled $238.16 million, with a pre-tax gain of approximately $3.88
million recognized. During 1998, cash proceeds from securitizations of junior
lien mortgage loans totaled $430.03 million, with pre-tax gains of $8.60 million
recognized. During 1997, cash proceeds from the securitization of junior lien
28
mortgage loans totaled $33.18 million, with a pre-tax gain of $1.08 million
recognized. Each of the Company's six securitized loan pools is serviced by the
Company's mortgage loan servicing division.
As of December 31, 1999 and 1998, the Company reported retained interests in
its securitizations of approximately $76.96 million and $65.62 million,
respectively. The value of the retained interests is determined using cash flow
modeling techniques that incorporate key assumptions related to default,
prepayment, and discount rates. During 1999, the Company recorded adjustments to
the recorded value of its retained interests which reduced the estimated fair
value of these assets by approximately $20.16 million, net of tax. Adjustments
to the estimated fair value of retained interests are primarily the result of
the actual performance of the underlying collateral pools and changes in the
expected future performance of those loans. Additionally, the actual performance
of the underlying collateral loans has resulted in the delay in the expected
timing of the receipt of future cash flows by the Company as a result of
increased overcollateralization requirements.
Key assumptions used in estimating the fair value of the Company's retained
interests as of December 31, 1999 and 1998 were as follows:
December 31
1999 1998
-----------------------
Prepayment speed (CPR) 15-21% 17-21%
Weighted average cumulative defaults 13.61% 10.00%
Weighted average discount rate 14.00% 12.23%
At December 31, 1999, the sensitivity of the current estimated fair value of
retained interests to immediate ten percent and twenty percent adverse changes
were as follows:
Book value at December 31, 1999 $76,963
Prepayment curve:
Impact on fair value of 10% adverse change (418)
Impact on fair value of 20% adverse change (786)
Default curve:
Impact on fair value of 10% adverse change (6,993)
Impact on fair value of 20% adverse change (13,445)
Discount rate:
Impact on fair value of 10% adverse change (5,287)
Impact on fair value of 20% adverse change (10,093)
These sensitivity analyses are hypothetical. As these figures indicate, any
change in estimated fair value based on a ten percent variation in assumptions
cannot be extrapolated because the relationship of the change in assumption to
the change in fair value is not linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the retained interests
is calculated independent from any change in another assumption; in reality,
changes in one factor may result in changes in another, which may magnify or
counteract the sensitivities.
- - - - - - - - -------------------------------------------------------------------------------
Note Ten
Loan Servicing
- - - - - - - - -------------------------------------------------------------------------------
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of loans serviced for others was
$1.69 billion and $1.77 billion at December 31, 1999 and 1998, respectively.
Mortgage loan servicing rights of $9.84 million and $8.87 million at
December 31, 1999 and 1998, respectively, are included in other assets in the
accompanying balance sheets. The fair value of mortgage loan servicing rights at
December 31, 1999 and 1998 exceeds the recorded value; therefore, no valuation
allowance is necessary. Amortization of mortgage loan servicing rights
approximated $2.44 million, $765,000, and $383,000 during the years ended
December 31, 1999, 1998, and 1997, respectively.
- - - - - - - - -------------------------------------------------------------------------------
Note Eleven
Premises And Equipment
- - - - - - - - -------------------------------------------------------------------------------
A summary of premises and equipment and related accumulated depreciation are
summarized as follows:
December 31
1999 1998
-----------------------
(in thousands)
Land, buildings, and improvements $ 62,176 $ 64,034
Furniture, fixtures, and equipment 62,561 57,026
-----------------------
124,737 121,060
Less allowance for depreciation (58,618) (49,966)
-----------------------
$ 66,119 $ 71,094
=======================
Note Twelve
Scheduled Maturities Of Time Certificates Of Deposits Of $100,000 Or More
Scheduled maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1999 and 1998, are summarized as follows:
1999 1998
-----------------------
(in thousands)
Within one year $169,093 $156,165
Over one through two years 37,488 42,603
Over two through three years 10,513 11,084
Over three through four years 2,359 1,202
Over four through five years 3,472 1,484
-----------------------
Total $222,925 $212,538
=======================
The Company has agreements with three investment banking firms to issue over
$100 million of the Company's certificates of deposit. The certificates of
deposit can be issued in maturities of up to five years at rates equal to a
comparable treasury at the time of issuance plus a market-based spread. The
29
Company is not committed to issuing a pre-determined amount of its certificates
of deposit under these agreements, the use of which is at the sole discretion of
the Company. At December 31, 1999 and 1998, $28.04 million and $22 million,
respectively, of certificates of deposit had been sold under these agreements at
an average interest rate of 5.72% and 5.36%, respectively. The average remaining
term of the issued certificates of deposit was 6 months and 1.5 years at
December 31, 1999 and 1998, respectively.
- - - - - - - - -------------------------------------------------------------------------------
Note Thirteen
Short-Term Borrowings
- - - - - - - - -------------------------------------------------------------------------------
Short-term borrowings include an obligation of the Parent Company consisting
of a $24.00 million revolving credit facility (the "Line of Credit") with an
unrelated party. At December 31, 1999, $12.13 million was outstanding. The Line
of Credit, renewable annually, has a variable rate (7.37875% at December 31,
1999) with interest payments due quarterly and principal due at maturity. The
Line of Credit agreement contains certain restrictive provisions applicable to
the Parent Company including limitations on additional debt and requiring the
maintenance of certain pre-defined ratios relative to Return on Average Assets,
Equity to Assets, Loan Loss Reserve and Non-Performing Assets to Loans. The
Parent Company has pledged the common stock of City National Bank as collateral
for the Line of Credit. At December 31, 1999, the Company was in violation of a
loan covenant under this agreement relating to required return on average asset
ratios. The Company obtained a waiver for this violation.
Short-term borrowings also include advances from the Federal Home Loan Bank
of Pittsburgh (FHLB) and securities sold under agreement to repurchase. The
underlying securities included in repurchase agreements remain under the
Company's control during the effective period of the agreements. A summary of
the Company's short-term borrowings is set forth below:
(in thousands)
1999:
- - - - - - - - ----
Average amount outstanding during the year $230,060
Maximum amount outstanding at any month end 375,251
Weighted average interest rate:
During the year 4.97%
End of the year 5.18%
1998:
- - - - - - - - ----
Average amount outstanding during the year $187,140
Maximum amount outstanding at any month end 307,185
Weighted average interest rate:
During the year 5.17%
End of the year 4.83%
1997:
- - - - - - - - ----
Average amount outstanding during the year $190,467
Maximum amount outstanding at any month end 322,445
Weighted average interest rate:
During the year 5.22%
End of the year 5.24%
- - - - - - - - -------------------------------------------------------------------------------
Note Fourteen
Long-Term Debt
- - - - - - - - -------------------------------------------------------------------------------
Long-term debt includes an obligation of the Parent Company consisting of a
$16.00 million term loan (the "Loan") with an unrelated party. At December 31,
1999, $16.00 million was outstanding. The Loan agreement, which matures on
October 1, 2009, requires ten equal, annual principal payments of $1.60 million,
with interest payments due quarterly. The Loan has a variable rate (7.37875% at
December 31, 1999). The Loan and the Line of Credit (see Note Thirteen)
agreements were entered into on October 19, 1999, as part of the Parent
Company's long-term debt restructuring. The Loan agreement has the same
restrictive provisions as the Line of Credit and the Parent Company has pledged
the same collateral for the Loan as was pledged for the Line of Credit.
The Company, through its banking subsidiaries, maintains long-term financing
from the FHLB as follows:
December 31, 1999
------------------------------
Amount Amount
Available Outstanding Interest Rate Maturity Date
- - - - - - - - ---------------------------------------------------------------
(in thousands)
$10,000 $ 10,000 5.60% July 2002
25,000 25,000 5.47 September 2002
25,000 25,000 5.45 October 2006
5,000 5,000 5.48 February 2008
10,000 10,000 4.86 October 2008
25,000 25,000 5.52 October 2009
----------------
$ 100,000
================
The Company has purchased, through its banking subsidiaries, 313,366 shares
of FHLB stock at par value. Such purchases entitle the Company to dividends
declared by the FHLB and provide an additional source of short-term and
long-term funding, in the form of collateralized advances.
Financing obtained from the FHLB is based in part on the amount of
qualifying collateral available, specifically U.S. Treasury and agency
securities, mortgage-backed securities, and residential real estate loans. At
December 31, 1999, collateral pledged to the FHLB included approximately $58
million in investment securities and $497 million in residential real estate
loans.
In addition to the short-term (see Note Thirteen) and long-term financing
discussed above, at December 31, 1999, the Company's banking subsidiaries had an
additional $352.12 million available from unused portions of lines of credit
with the FHLB and the Federal Reserve Bank. Of the $352.12 million available,
$60.00 million represented liquidity sources the Company had obtained in
preparation for potential Year 2000 depositor concerns.
30
- - - - - - - - -------------------------------------------------------------------------------
Note Fifteen
Trust Preferred Securities
- - - - - - - - -------------------------------------------------------------------------------
On October 27, 1998, City Holding Capital Trust II (Capital Trust II), a
special-purpose statutory trust subsidiary of the Company sold via public
offering $57.5 million of 9.125% trust preferred capital securities (the Capital
Securities II) and issued $1.8 million of common securities to the Company.
Distributions on the Capital Securities II are payable quarterly and each
Capital Security has a stated liquidation value of $25. To fund Capital Trust
II, the Company sold to Capital Trust II $59.3 million in 9.125% Junior
Subordinated Debentures (the Debentures II) with a stated maturity date of
October 31, 2028. The sole assets of Capital Trust II are the Debentures II.
Cash distributions on the Capital Securities II in Capital Trust II are made to
the extent interest on the Debentures II is received by Capital Trust II. The
Company, through various agreements, has irrevocably and unconditionally
guaranteed all of Capital Trust II's obligations under the Capital Securities II
regarding payment of distributions and payment on liquidation or redemption of
the Capital Securities II, but only to the extent of funds held by Capital Trust
II. The Capital Securities II are subject to mandatory redemption (i) in whole,
but not in part, at the Stated Maturity upon repayment of the Debentures II,
(ii) prior to October 31, 2003, in whole, but not in part, contemporaneously
with the optional redemption at any time by the Company of the Debentures II at
any time within 90 days following an event of certain changes or amendments to
regulatory requirements or federal income tax rules and (iii) in whole or in
part, at any time on or after October 31, 2003, contemporaneously with the
optional redemption by the Company of the Debentures II at a redemption price
equal to the aggregate liquidation amount of the Capital Securities II, plus
accumulated but unpaid distributions thereon. After deducting expenses incurred
in the issuance, the Company received proceeds of $55.34 million from the
Capital Securities II offering.
On March 31, 1998, City Holding Capital Trust (the Trust), a special-purpose
statutory trust subsidiary of the Company, issued $30 million in 9.15% trust
preferred capital securities (the Capital Securities) to certain qualified
institutional investors and $928,000 of common securities (the Common
Securities) to the Company. Distributions on the Capital Securities are payable
semi-annually, and each Capital Security has a stated liquidation amount of
$1,000. To fund the Trust, the Company sold to the Trust $30.9 million in 9.15%
Junior Subordinated Debentures (the Debentures) with a stated maturity date of
April 1, 2028. The sole assets of the Trust are the Debentures. Cash
distributions on the Capital Securities are made to the extent interest on the
Debentures is received by the Trust. The Company, through various agreements,
has irrevocably and unconditionally guaranteed all of the Trust's obligations
under the Capital Securities regarding payment of distributions and payment on
liquidation or redemption of the Capital Securities, but only to the extent of
funds held by the Trust. In the event of certain changes or amendments to
regulatory requirements or federal income tax rules, the Capital Securities are
redeemable in whole at par or, if greater, a make-whole amount. Otherwise, the
Capital Securities are generally redeemable in whole or in part on or after
April 1, 2008, at a declining redemption price ranging from 104.58% to 100% of
the liquidation amount. On or after April 1, 2018, the Capital Securities may be
redeemed at 100% of the liquidation amount. After deducting expenses incurred in
the issuance, the Company received proceeds of $29.2 million from the Capital
Securities offering.
The obligations outstanding under Capital Trust II and the Capital Trust are
classified as "Corporation-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated debentures of City
Holding Company" in the liabilities section of the consolidated balance sheets.
Distributions on the capital securities are recorded in the consolidated
statements of income as interest expense. The Company's interest payments on the
Debentures are fully tax deductible.
For regulatory purposes, the Company has included $72.96 million and $72.02
million of the total offerings in its Tier I capital for risk-based capital
computations at December 31, 1999 and 1998, respectively. The remaining $14.54
million and $15.48 million, respectively, is included in the Company's total
risk-based capital.
- - - - - - - - -------------------------------------------------------------------------------
Note Sixteen
Restrictions On Subsidiary Dividends
- - - - - - - - -------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the subsidiary banks to
transfer funds to the Parent Company in the form of cash dividends. The approval
of the banks' applicable primary regulator is required prior to the payment of
dividends by a subsidiary bank in excess of its earnings retained in the current
year plus retained net profits for the preceding two years. During 2000, the
subsidiary banks can, without prior regulatory approval, declare dividends of
approximately $1.69 million to the Parent Company, plus retained net profits for
the interim period through the date of declaration.
- - - - - - - - --------------------------------------------------------------------------------
Note Seventeen
Income Taxes
- - - - - - - - -------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
31
December 31
1999 1998
-------------------------
(in thousands)
Deferred tax assets:
Allowance for loan losses $11,906 $ 7,213
Loans held for sale 2,251 2,224
Deferred compensation payable 2,360 3,543
Unrealized losses 10,498 416
Capital loss carryforward 4,033 -
Other 2,118 1,925
-------------------------
Total Deferred Tax Assets 33,166 15,321
Deferred tax liabilities:
Premises and equipment 1,879 2,197
Core deposit intangible 759 947
Loans - 713
Other 1,624 1,840
-------------------------
Total Deferred Tax Liabilities 4,262 5,697
-------------------------
Net Deferred Tax Assets $28,904 $ 9,624
=========================
Significant components of the provision for income taxes are as follows:
1999 1998 1997
-----------------------------------
(in thousands)
Federal:
Current $10,072 $9,261 $13,129
Deferred (9,198) (3,011) (909)
-----------------------------------
874 6,250 12,220
State 968 243 2,293
-----------------------------------
Total $ 1,842 $6,493 $14,513
===================================
Current income tax expense attributable to investment securities
transactions approximated $53,000 in 1999 and $3,000 in 1998 and 1997.
As of December 31, 1999, the Company has approximately $1.0 million of
federal net operating loss carryforwards that expire in 2006.
A reconciliation between income taxes as reported and the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:
1999 1998 1997
----------------------------
(in thousands)
Computed federal taxes and
statutory rate $2,819 $4,104 $14,086
State income taxes, net of
federal tax benefit 630 159 1,446
Tax effects of:
Nontaxable interest income (1,703) (1,601) (1,648)
Non-deductible merger charges - 1,716 -
Non-deductible goodwill 427 1,110 -
Other items, net (331) 1,005 629
----------------------------
$1,842 $6,493 $14,513
============================
- - - - - - - - -------------------------------------------------------------------------------
Note Eighteen
Employee Benefit Plans
- - - - - - - - -------------------------------------------------------------------------------
The Company's 1993 Stock Incentive Plan (the "Plan"), as amended, provides
for the grant of options to key employees of the Company and persons who provide
services to the Company who have or can be expected to contribute significantly
to the profits or growth of the Company, including Directors of the Company or
its subsidiaries. The Plan, as amended, has authorized the grant of options for
up to 1,300,000 shares of the Company's common stock, adjusted for changes in
the capital structure of the Company since the Plan's inception. As of December
31, 1999, 1,399,300 options are authorized for grant, of which 587,000 have been
awarded to date. Specific terms of options awarded, including vesting periods,
exercise prices and expiration periods are determined at the date of grant and
are evidenced by agreements between the Company and the awardee.
Proforma information regarding net income and earnings per share is required
by Statement No. 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: a risk-free interest rate of 5.90%, 5.37%, and 5.90% for 1999,
1998, and 1997, respectively; an expected dividend yield of 5.25%, 2.04%, and
2.50% for 1999, 1998, and 1997, respectively; a volatility factor of .293, .255,
and .266 for 1999, 1998, and 1997, respectively; and an expected life of the
option of four years for each period.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. Pro forma net income
for the years ended December 31, 1999 and 1998 were $10.11 million or $0.60 per
basic and diluted common share and $3.40 million or $0.20 per basic and diluted
common share, respectively. The effect of applying the fair value method to the
Company's employee stock options in 1997 results in net income and earnings per
share that are not materially different from the amounts reported.
A summary of the Company's stock option activity and related information for
the years ended December 31 is presented below:
32
1999 1998
------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------------------------------------
Outstanding at January 1 380,781 $32.26 177,169 $21.73
Granted 238,250 15.25 249,438 40.62
Exercised (30,461) 17.11 (36,768) 18.43
Forfeited (26,603) 31.74 (9,058) 33.31
-------- ---------
Outstanding at December 31 561,967 $27.19 380,781 $32.26
======== =========
Exercisable at end of year 313,300 $31.74 271,934 $31.35
Weighted-average fair
value of options
granted during the
year $3.06 $10.44
Additional information regarding stock options outstanding and exercisable
at December 31, 1999, is provided in the following table:
Weighted Weighted
Average Average
Weighted Remaining No. of Exercise Price
Ranges of No. of Average Contractual Options of Options
Exercise Options Exercise Life Currently Currently
Prices Outstanding Price (Months) Exercisable Exercisable
- - - - - - - - -------------------------------------------------------------------------------
$12.83 - $19.25 265,188 $15.51 56 72,478 $16.14
$19.84 - $29.76 71,688 25.00 28 71,688 25.00
$33.00 - $42.75 225,091 41.64 38 169,134 41.28
---------- -----------
561,967 313,300
========== ===========
The City Holding Company Profit Sharing and 401(k) Plan (the Plan) is a
deferred compensation plan under section 401(k) of the Internal Revenue Code.
All employees who complete one year of service are eligible to participate in
the Plan. Participants may contribute from 1% to 15% of pre-tax earnings to
their respective accounts. These contributions may be invested in any of six
investment options selected by the employee, one of which is City Holding
Company common stock. The Company matches 50% of the first 6% of compensation
deferred by the participant with City Holding Company common stock. Although the
profit sharing features of this plan remain intact, future profit contributions,
if any, are expected to be made to the employee stock ownership plan discussed
below.
The City Holding Company Employees' Stock Ownership Plan (ESOP), covering
all employees who have completed one year of service and have attained the age
of 21, was created January 1, 1996 and includes both Money Purchase and Stock
Bonus plan features. Annually, the Company will contribute to the Money Purchase
account an amount equal to 9% of eligible compensation. Contributions to the
Stock Bonus account are discretionary, as determined by the Company's Board of
Directors.
The Company's total expense associated with the Plan and the ESOP
(collectively, the benefit plans) approximated $5.39 million, $2.28 million, and
$2.46 million in 1999, 1998, and 1997, respectively. The total number of shares
of the Company's common stock held by the benefit plans is 431,208. Other than
the benefit plans, the Company offers no postretirement benefits.
Prior to its merger with the Company, Horizon maintained a defined benefit
pension plan covering substantially all of its employees. During 1999, the
Company froze the Horizon defined benefit plan and the accrual for the future
service of the employees covered by this defined benefit plan was transferred to
the Company's defined contribution plan. As a result of freezing the Horizon
plan, the accrual of defined benefits for future services was eliminated
resulting in the Company recognizing a $3.67 million curtailment gain,
representing the change in projected benefit obligations, less $1.00 million
charge-off of prior service costs associated with the plan. The following table
summarizes the benefit obligation and plan asset activity of the plan:
Pension Benefits
1999 1998
-----------------------
(in thousands)
Change in fair value of plan assets:
Balance at beginning of measurement
period $9,351 $8,093
Actual return on plan assets 460 584
Employer contribution 118 875
Benefits paid (315) (201)
-----------------------
Balance at end of measurement period 9,614 9,351
Change in benefit obligation:
Balance at beginning of measurement (12,034) (8,870)
period
Curtailment 3,699 -
Service cost (331) (1,018)
Interest cost (524) (718)
Actuarial loss gain (loss) 1,746 (1,629)
Benefits paid 315 201
-----------------------
Balance at end of measurement period (7,129) (12,034)
-----------------------
Funded status 2,485 (2,683)
Unamortized prior service cost - 1,008
Unrecognized net actuarial gain (1,568) (156)
Unrecognized net obligation (256) (286)
-----------------------
Prepaid (Accrued) Benefit Cost $ 661 $(2,117)
=======================
Weighted-average assumptions as of December 31:
Discount rate 8.00% 7.25%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
Plan assets consist principally of U.S. Government securities, corporate
stocks and bonds, and other short-term investments.
The following table presents the components of net defined benefit pension
costs:
Pension Benefits
1999 1998 1997
-----------------------------
(in thousands)
Components of net periodic benefit
cost:
Service cost $ 331 $1,018 $ 751
Interest cost 524 718 561
Expected return on plan (766) (680) (650)
assets
Net amortization and deferral (58) 103 80
Curtailment (3,699) - -
Prior service cost recognized 1,008 - -
-----------------------------
Benefit Cost $(2,660) $1,159 $ 742
-----------------------------
33
Horizon has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of active service from the date of
the respective agreement. The cost of such agreements approximated $425,000,
$449,000, and $395,000 during 1999, 1998, and 1997. The liability for such
agreements approximated $2.76 million and $2.56 million at December 31, 1999 and
1998, and is included in other liabilities in the accompanying consolidated
balance sheets.
To assist in funding the above liabilities, Horizon has insured the lives of
certain directors and officers. Horizon is the owner and beneficiary of the
insurance policies with a cash surrender value approximating $3.46 million and
$3.41 million at December 31, 1999 and 1998, included in other assets in the
accompanying consolidated balance sheets.
- - - - - - - - -------------------------------------------------------------------------------
Note Nineteen
Other Income and Expenses
- - - - - - - - -------------------------------------------------------------------------------
Regulatory agencies approved the merger with Horizon subject to the
Company's eventual divesting of certain branch facilities in those locations
where the combined entity would have maintained an excessive percentage of
deposit market share. In complying with regulatory requirements, and as part of
the Company's overall post-merger reorganization, the Company completed the sale
of seven branch locations during 1999. As a result of those sales, the Company
sold approximately $121.48 million of deposits and $54.89 million of loans to
third parties resulting in gains realized by the Company of approximately $8.80
million. These gains have been included in Other Income within the Consolidated
Statements of Income. No other individual items exceeded one percent of total
revenue in 1999, 1998, or 1997.
Excluding amortization of intangible assets, the following items of other
expense exceeded one percent of total revenue for the respective years:
1999 1998 1997
----------------------------------
(in thousands)
Professional fees $4,325 $9,671 $1,975
Telecommunications 4,756 4,317 2,165
Office supplies 3,994 3,558 2,252
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty
Commitments And Contingent Liabilities
- - - - - - - - -------------------------------------------------------------------------------
In the normal course of business, certain financial products are offered by
the Company to accommodate the financial needs of its customers. Loan
commitments (lines of credit) represent the principal off-balance sheet
financial product offered by the Company. At December 31, 1999 and 1998,
commitments outstanding to extend credit totaled approximately $299.44 million
and $195.60 million, respectively. To a much lesser extent, the Company offers
standby letters of credit which require payments to be made on behalf of
customers when certain specified future events occur. Amounts outstanding
pursuant to such standby letters of credit were $35.60 million and $9.07 million
as of December 31, 1999 and 1998, respectively. Historically, substantially all
standby letters of credit have expired unfunded.
Loan commitments and standby letters of credit have credit risks essentially
the same as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Collateral is obtained based on management's
credit assessment of the customer. Management does not anticipate any material
losses as a result of these commitments.
Note Twenty-One
Preferred Stock And Shareholder Rights Plan
The Company's Board of Directors has the authority to issue preferred stock,
and to fix the designation, preferences, rights, dividends and all other
attributes of such preferred stock, without any vote or action by the
shareholders. As of December 31, 1999, there are no such shares outstanding, nor
are any expected to be issued, except as might occur pursuant to the Stock
Rights Plan discussed below.
The Company's Stock Rights Plan provides that each share of common stock
carries with it one right. The rights would be exercisable only if a person or
group, as defined, acquired 10% or more of the Company's common stock, or
announces a tender offer for such stock. Under conditions described in the Stock
Rights Plan, holders of rights could acquire shares of preferred stock or
additional shares of the Company's common stock, or in the event of a 50% or
more change-in-control, shares of common stock of the acquirer. The value of
shares acquired under the plan would equal twice the exercise price.
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty-Two
Regulatory Matters
- - - - - - - - -------------------------------------------------------------------------------
The Company, including its banking subsidiaries, is subject to various
regulatory capital requirements administered by the various banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, action by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and its banking subsidiaries must meet
34
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. The Company's and its banking subsidiaries' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined). Management believes, as
of December 31, 1999, that the Company and its banking subsidiaries met all
capital adequacy requirements to which they were subject.
As of December 31, 1999, the most recent notifications from banking
regulatory agencies categorized the Company and its banking subsidiaries as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized," the Company and its banking
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, and Tier
I leverage ratios set forth in the table below. There are no conditions or
events since notifications that management believes have changed the
institutions' categories. The Company's and its significant banking subsidiary's
actual capital amounts and ratios are presented in the following table.
Well
1999 1998 Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
----------------------------------------------------
(in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $281,465 11.0% $282,100 12.0% 10% 8%
City National 285,722 11.8 162,248 10.7 10 8
Tier I Capital (to Risk Weighted Assets):
Consolidated 238,188 9.3 249,018 10.6 6 4
City National 260,404 10.8 153,608 10.1 6 4
Tier I Capital (to Average Assets):
Consolidated 238,188 8.8 249,018 10.0 5 4
City National 260,404 10.1 153,608 8.9 5 4
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty-Three
Fair Values of Financial Instruments
- - - - - - - - -------------------------------------------------------------------------------
FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FASB No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following table represents the estimates of fair value of financial
instruments:
Fair Value of Financial Instruments
1999 1998
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
(in thousands)
Assets:
Cash and due from
banks $122,112 $122,112 $119,777 $119,777
Securities 381,112 381,112 395,722 397,198
Net loans 1,865,001 1,842,184 1,698,319 1,701,744
Loans held for
sale 118,025 118,025 246,287 246,287
Retained interests 76,963 76,963 65,623 65,623
Liabilities:
Deposits 1,955,770 1,845,147 2,064,415 2,083,845
Short-term
borrowings 386,719 386,719 183,418 183,418
Long-term debt 116,000 110,389 102,719 105,493
Trust preferred
securities 87,500 85,333 87,500 87,493
The following methods and assumptions were used in estimating fair value
amounts for financial instruments:
The fair value of the loan portfolio is estimated using discounted cash flow
analyses at interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. The carrying value of accrued interest
approximates its fair value.
The fair value of the retained interests is determined using cash flow
modeling techniques that incorporate key assumptions related to default,
prepayment, and discount rates.
The fair value of demand deposits (i.e. interest and noninterest-bearing
checking, regular savings, and other types of money market demand accounts) are,
by definition, equal to their carrying values. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregate expected monthly maturities of time deposits.
Securities sold under agreements to repurchase represent borrowings with
original maturities of less than 90 days. The carrying amount of advances from
the FHLB and borrowings under repurchase agreements approximate their fair
values.
The fair value of long-term borrowings is estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The fair value of trust preferred securities is estimated using a discounted
cash flow calculation that applies interest rates that would be currently
offered on such securities.
35
The fair values of commitments are estimated based on fees currently charged
to enter into similar agreements, taking into consideration the remaining terms
of the agreements and the counterparties' credit standing. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The fair values approximated the
carrying values of these commitments and letters of credit as of December 31,
1999 and 1998.
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty-Four
City Holding Company (Parent Company Only) Financial Information
- - - - - - - - -------------------------------------------------------------------------------
Condensed Balance Sheets
December 31
1999 1998
---------------------
(in thousands)
Assets
Cash $ 3,386 $ 6,362
Securities available for sale 2,234 3,636
Investment in subsidiaries 308,998 311,879
Fixed assets 1,039 6,080
Other assets 6,176 5,557
---------------------
Total Assets $321,833 $333,514
=====================
Liabilities
Short-term borrowings $ 12,134 $ -
Long-term debt 16,000 15,000
Junior subordinated debentures 90,114 90,114
Advances from affiliates 934 1,191
Other liabilities 4,109 7,150
---------------------
Total Liabilities 123,291 113,455
Stockholders' Equity 198,542 220,059
---------------------
Total Liabilities and
Stockholders' Equity $321,833 $333,514
=====================
Advances from affiliates, which eliminate for purposes of the Company's
consolidated financial statements, represent amounts borrowed from banking
subsidiaries to fund the purchase of certain bank premises and to meet other
cash needs of the Parent. Such debt is collateralized by investment securities
owned by the Parent Company. Interest is due quarterly at prime with principal
due at maturity in 2000. Junior subordinated debentures, which eliminate for
purposes of the Company's consolidated financial statements, represent the
Parent Company's amounts owed to City Holding Capital Trust II and City Holding
Capital Trust (see NOTE FIFTEEN).
Condensed Statements of Income
Year Ended December 31
1999 1998 1997
---------------------------
(in thousands)
Income
Dividends from bank subsidiaries $20,000 $17,879 $20,351
Administrative fees 1,743 6,239 6,065
Other income 703 286 1,001
---------------------------
22,446 24,404 27,417
Expenses
Interest expense 9,606 4,799 2,273
Other expenses 10,322 27,232 15,352
---------------------------
19,928 32,031 17,625
---------------------------
Income Before Income Tax
Benefit and (Excess
Dividends) Equity in
Undistributed Net Income
of Subsidiaries 2,518 (7,627) 9,792
Income tax benefit (6,945) (7,795) (3,615)
---------------------------
Income Before (Excess
Dividends) Equity in
Undistributed Net Income of 9,463 168 13,407
Subsidiaries
(Excess Dividends) Equity in
Undistributed Net
Income of Subsidiaries (3,250) 5,066 12,884
---------------------------
Net Income $ 6,213 $5,234 $26,291
===========================
Condensed Statements of Cash Flows
Year Ended December 31
1999 1998 1997
---------------------------
(in thousands)
Operating Activities
Net income $ 6,213 $5,234 $26,291
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for depreciation 897 2,687 1,843
Increase (decrease) in other
assets 2,356 7,278 219
(Decrease) increase in other
liabilities (6,513) 2,945 2,084
Excess dividends of
subsidiaries (Equity in 3,250 (5,066) (12,884)
undistributed net income)
Realized investment securities
gain - - (308)
---------------------------
Net Cash Provided by
Operating Activities 6,203 13,078 17,245
Investing Activities
Cash paid in acquisition (15,134) - (15,447)
Proceeds from maturities of
investment securities - - 537
Proceeds from sales of securities 1,599 769 496
Purchases of investment securities (558) (2,132) (514)
Net change in loans 46 - 1,644
Cash invested in subsidiaries - (50,399) (4,495)
Proceeds from sale of net assets
to City National 6,731 - -
Purchases of premises and
equipment (1,392) (733) (3,953)
---------------------------
Net Cash Used in Investing
Activities (8,708)(52,495) (21,732)
Financing Activities
Proceeds from long-term debt 23,134 43,800 9,150
Principal repayments on long-term
debt (10,000)(69,200) 7,000
(Decrease) increase in advance
from affiliates (257) 257 -
Net proceeds from issuance of
junior subordinated debentures - 86,762 -
Cash dividends paid (13,471)(12,167) (11,421)
Purchases of treasury stock (398) (6,987) (2,840)
Proceeds from sales of treasury
stock - - 80
Exercise of stock options 521 675 65
Net cash received from stock
transactions - - 29
---------------------------
Net Cash (Used in) Provided
by Financing Activities (471) 43,140 2,063
---------------------------
(Decrease) Increase in Cash
and Cash Equivalents (2,976) 3,723 (2,424)
Cash and cash equivalents at
beginning of year 6,362 2,639 5,063
---------------------------
Cash and Cash Equivalents at
End of Year $3,386 $6,362 $2,639
===========================
36
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty-Five
Segment Reporting
- - - - - - - - -------------------------------------------------------------------------------
The Company operates three business segments: community banking, mortgage
banking, and other financial services. These business segments are primarily
identified by the products or services offered and the channels through which
the product or service is offered. The community banking operations consists of
various community banks that offer customers traditional banking products and
services through various delivery channels. The mortgage banking operations
include the origination, acquisition, servicing, and sale of mortgage loans. The
other financial services business segment consists of nontraditional services
offered to customers, such as investment advisory, insurance, and internet
technology products. Another defined business segment of the Company is
corporate support which includes the parent company and other support needs.
To more effectively evaluate and manage the operating performance of each of
the Company's business lines, effective April 1, 1999, internal warehouse
funding was established for each division within the mortgage-banking and other
financial services segments. Prior to April 1, 1999, the community-banking
segment provided necessary funding to the divisions within the mortgage-banking
and other financial services segments with no associated interest cost.
Beginning April 1, 1999, any division that has obtained financing from the
community-banking segment is charged a cost of funds, at market interest rates,
on the amount of funds borrowed from the community-banking segment. Management
has determined that the internal warehouse funding policy provides a
"fully-costed" assessment of the operating performance of each division and that
instituting such policy provides a more accurate analysis of the performance of
each division and business segment. Financial information presented in the
following tables has been presented reflecting the actual internal policy in
place during each respective period.
The accounting policies for each of the business segments are the same as
those of the Company described in Note One. Selected segment information is
included in the following table:
Other
Community Mortgage Financial General
Banking Banking Services Corporate Eliminations Consolidated
------------------------------------------------------------------------------
1999
- - - - - - - - ----
Net interest income (expense) $ 105,381 $ (5,273) $ (171) $(1,517) $ - $ 98,420
Provision for loan losses 19,286 - - - - 19,286
------------------------------------------------------------------------------
Net interest income (expense) after provision for
loan losses 86,095 (5,273) (171) (1,517) - 79,134
Other income 29,850 22,523 12,495 64 (5,397) 59,535
Other expenses 80,387 33,528 14,792 7,304 (5,397) 130,614
------------------------------------------------------------------------------
Income before income taxes 35,558 (16,278) (2,468) (8,757) - 8,055
Income tax expense (benefit) 12,920 (5,995) (808) (4,275) - 1,842
------------------------------------------------------------------------------
Net Income $ 22,638 $(10,283) $(1,660) $(4,482) $ - $ 6,213
==============================================================================
Average assets $2,572,162 $306,819 $13,381 $12,697 $(186,327) $2,718,732
==============================================================================
1998
- - - - - - - - ----
Net interest income (expense) $ 96,085 $ 8,906 $ 64 $(1,712) $ - $ 103,343
Provision for loan losses 8,481 - - - - 8,481
------------------------------------------------------------------------------
Net interest income (expense) after provision for
loan losses 87,604 8,906 64 (1,712) - 94,862
Other income 19,355 47,414 11,133 216 (5,695) 72,423
Other expenses 82,100 50,752 11,502 16,899 (5,695) 155,558
------------------------------------------------------------------------------
Income before income taxes 24,859 5,568 (305) (18,395) - 11,727
Income tax expense (benefit) 9,816 1,798 (8) (5,113) - 6,493
------------------------------------------------------------------------------
Net Income $ 15,043 $ 3,770 $ (297) $(13,282) $ - $ 5,234
==============================================================================
Average assets $2,202,104 $336,367 $14,660 $12,968 $ - $2,566,099
==============================================================================
1997
Net interest income (expense) $ 90,769 $ 8,456 $ 3 $(2,074) $ - $ 97,154
Provision for loan losses 4,064 - - - - 4,064
------------------------------------------------------------------------------
Net interest income (expense) after provision for
loan losses 86,705 8,456 3 (2,074) - 93,090
Other income 13,858 17,636 446 673 - 32,613
Other expenses 61,165 14,702 366 8,666 - 84,899
------------------------------------------------------------------------------
Income before income taxes 39,398 11,390 83 (10,067) - 40,804
Income tax expense (benefit) 12,604 4,284 36 (2,411) - 14,513
------------------------------------------------------------------------------
Net Income $ 26,794 $ 7,106 $ 47 $(7,656) $ - $ 26,291
==============================================================================
Average assets $2,041,150 $133,792 $ 627 $ 4,891 $ - $2,180,460
==============================================================================
Internal warehouse funding between the community banking segment and the
mortgage banking and other financial services segments is eliminated in the
Consolidated Balance Sheets. Services provided to the banking segments by the
direct mail, insurance, and internet service provider divisions are eliminated
in the Consolidated Statements of Income.
37
- - - - - - - - -------------------------------------------------------------------------------
Note Twenty-Six
Summarized Quarterly Financial Information (Unaudited)
- - - - - - - - -------------------------------------------------------------------------------
A summary of selected quarterly financial information for 1999 and 1998
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------
(in thousands, except common share data)
1999
- - - - - - - - ----
Interest income $50,595 $48,073 $47,868 $49,017
Interest expense 24,196 23,718 23,986 25,233
Net interest income 26,399 24,355 23,882 23,784
Provision for possible
loan losses 2,414 2,229 2,684 11,959
Investment securities
gains (losses) 42 6 4 (9,949)
Net income (loss) 5,245 6,994 2,318 (8,344)
Basic earnings per common
share 0.31 0.42 0.14 (0.49)
Diluted earnings per
common share 0.31 0.42 0.14 (0.49)
Average common shares outstanding:
Basic 16,820 16,820 16,857 16,867
Diluted 16,820 16,820 16,857 16,867
1998
- - - - - - - - ----
Interest income $46,053 $49,701 $51,050 $49,876
Interest expense 21,203 23,026 24,664 24,444
Net interest income 24,850 26,675 26,386 25,432
Provision for possible
loan losses 1,229 1,238 1,949 4,065
Investment securities
gains (losses) (15) 9 11 2
Net income (loss) 6,737 6,999 6,575 (15,077)
Basic earnings per common
share 0.40 0.41 0.39 (0.89)
Diluted earnings per
common share 0.40 0.41 0.39 (0.89)
Average common shares outstanding:
Basic 16,642 16,879 16,850 16,821
Diluted 16,789 17,042 16,995 16,821
38